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Who Owns Your Life Insurance Policy?

While it is common to think of life insurance planning in terms of type and amount of coverage, a more complete analysis should also include policy ownership. In many cases, the proceeds of a life insurance policy may be unnecessarily included in your taxable estate unless you plan ahead to avoid this event.

There are two ways to keep insurance proceeds out of your estate:
  • Give your insurance policies to someone else, generally the beneficiary(ies), or
  • Transfer the policies to a trust.
Either option, if done properly and in a timely manner, will decrease your federal estate tax. You may not need to worry about changing ownership of a policy that names your spouse as the sole beneficiary. The unlimited marital deduction allows the policy proceeds to automatically escape estate taxation. However, if the purpose of the insurance is to help pay estate taxes or provide for heirs other than your spouse, you may benefit from transferring your policy out of your estate.

The paperwork involved in changing insurance policy ownership is relatively simple, requiring a form provided by the insurance company. However, you do have to sign away all rights to your policies (except the right to pay the premiums). That means the gift must be absolute and irrevocable. You cannot change your beneficiaries, and in the case of policies with cash value, you no longer have the right to borrow against them or cash them in.

If the transfer is done within three years of your death, the policy proceeds are counted as part of your estate, regardless of ownership. Thus, proper planning is necessary in order to ensure the desired results.

Ownership of individual, and in most cases group insurance, can be transferred to anyone in or out of your family who is old enough to handle money. However, insurance professionals advise against giving policies to an outsider in exchange for anything of value because that individual might be required to pay income tax on the proceeds. It is usually best to give policies to the beneficiaries or, in the case of a minor, to a trust that is designed for the benefit of the child.

It is important to carefully review the consequences before signing away insurance. Gifting insurance may have gift tax consequences if the transfer is to anyone other than your spouse. In addition, you should never give insurance away if you want to get any value out of it or if you think you’re going to change your mind.

For those in higher tax brackets, a better way to shelter large policies from estate taxes—and to protect the interests of children as beneficiaries—may be to transfer ownership to an irrevocable life insurance trust (ILIT). When you die, the trustee named by you will distribute income to your beneficiaries or, if necessary, use the proceeds to pay estate taxes. The issues of policy ownership are no less important than the considerations of what type of policy and how much insurance you need to fulfill your objectives. When planning your insurance program, take care to touch all the bases.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


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