Life Insurance Trusts

First poublished in Legal Advisory, Vol. 7

Many life insurance policies (especially term insurance) have little or no value during your lifetime. Therefore, the gift of a life insurance policy often has no gift tax consequence. Also, because term insurance does not have a cash value, a lifetime gift of term insurance has no taxable consequences. Upon your death the proceeds of the insurance policy are included in your federal estate and therefore subject to taxation. If you transfer ownership of a policy to an irrevocable life insurance trust and live three years after doing so, the proceeds of the life insurance policy at death will not be included in your estate, or the estate of your spouse, and therefore cannot be subject to taxation. Also if the insurance is initially acquired by the trust, rather than transferred to the trust after the policy has been issued, the proceeds will not be taxed in either you or your spouse’s estate, regardless of whether or not you live three