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Life Insurance Trusts – An Attractive Alternative to Estate Taxes

Life Insurance Trusts – An Attractive Alternative to Estate Taxes

By Britt Erica Tunick

It’s an unfortunate reality that planning for the future means planning for your ultimate demise. But simply taking out a life insurance policy is not necessarily enough to leave your family well positioned.

Like death, estate taxes (also known as death taxes) and inheritance taxes (or gift taxes) are also an unavoidable reality. How unpleasant the reality of death taxes can be depends entirely upon where you live at the time of your death.

Defined by the Internal Revenue Service as “a tax on your right to transfer property at your death,” estate taxes are taxes levied by the federal government on the overall value of everything an individual owns at the time of their death. In some states, such as Connecticut, New Jersey and Maryland, additional estate taxes and inheritance taxes are imposed on top of the federal government’s share. Needless to say, it is important to understand the specific taxes your estate will be hit with at the time of your death and to factor this into your planning by increasing the amount of insurance you take out.

Another option to consider is creating a life insurance trust, which legally allows your heirs to circumvent the taxes levied at the time of your death. Creating a trust and placing your life insurance benefits within it means that the payout at the time of your death will be paid to the trust, instead of an individual. Your heirs will still face tax payments on any money they receive through the trust, but at a much lower rate than they would face having to pay estate and inheritance taxes. Because the rules vary from state to state it is important to seek out a qualified financial advisor or experienced accountant for advice on how much life insurance you really need to leave your family well positioned and how to best protect the money paid out when you die.


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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand.
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