Posted on August 04, 2005 at 16:49:06:
Life insurance is designed to protect one’s family and heirs after death. It’s even more worthwhile if the policy’s proceeds can be protected against taxes.
There are two key issues: life insurance proceeds are income-tax free, no matter how much was paid in premiums. And the proceeds can be partly or totally free of estate taxes if the policy is not owned by the insured. While the policy could be owned by the beneficiary, a better bet is an irrevocable trust as the policy owner; this protects the money from lawsuits against beneficiary/owners, divorce and other untoward events. Another advantage is that a policy purchased by a trust is not subject to a waiting period before the proceeds are tax-exempt, as they would be if the insured merely transferred the policy.
Further, there are ways to make an annual gift to the trust, to pay the premium, within $11,000 annual gift tax exclusion.