Possessing Incidents of Ownership Over a Life Insurance Policy May Result in Estate Taxes Owed

When it comes time to meet with your estate planning attorney to discuss your assets, there are certain large items of property that will be of special importance. Typical examples would be a family’s primary residence in Anaheim, a business interest, or a life insurance policy. These assets are often significant and therefore play a large role in potential estate tax liabilities. If you are concerned about the estate tax and have a sizeable estate, your attorney may suggest that you create an irrevocable life insurance policy trust to hold a policy. This type of trust can be a very effective way to reduce or eliminate the estate tax. Without doing so, the proceeds from the policy may be included in your estate, and therefore taxable.

Will Your Life Insurance Proceeds Be Taxable?

Although many people are not aware of the rules surrounding life insurance policies, the reality is that most policies will be includable in your estate for estate tax purposes if you have any incidents of ownership over the policy. This essentially means that you have the right to exercise control over the property or to receive an economic benefit from it. Incidents of ownership include the following:

  • You own the life insurance policy.
  • You have the ability to change the beneficiary of the life insurance policy.
  • You have the ability to change or transfer the ownership of the life insurance policy.
  • You have the ability to use the value of the policy as collateral for a loan.
  • You have the ability to surrender the policy.
  • You have the power to act as a fiduciary of a trust that holds insurance on your life. If you are the creator of the trust, you supplied the policy to the trust or consideration to purchase the policy, or you retained the ability exercise a fiduciary power of the trust for your own benefit.

If you currently own a life insurance policy, it is important to meet with an estate planning attorney and discuss your options. We encourage you to reach out to us for more information. Send us an email; we look forward to learning more about your needs.

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