20 Ownership of Life Insurance by Someone Other Than the Insured

20. Ownership of Life Insurance by Someone Other Than the Insured A life insurance policy is an item of property taxable in one's estate if owned by the insured. Creative estate planning may require the transfer of existing policies to or the purchase of new policies by other persons or entities. Premium payments should be paid by the owner of the policy. If the policy was transferred as a present interest gift, the $10,000 annual gift tax exclusion applies. The gift should be made and the donee or trustee should pay the premiums from their accounts. If the Insured pays some or all of the premiums directly or through an agent (even an irrevocable trust) within 3 years of the transfer or purchase of the contract, then the entire proceeds are included in the decedent's estate. After 3 years have elapsed, only the premium payments made by the insured within 3 years of the date of death are includible in the estate. In the event the policyowner dies before the insured, special provisions must be made in the policy by naming a contingent owner. Also, a bequest must be made in the policyowner's will. If the above actions are not taken, the ownership may pass to the insured. Ownership should not be given to minors now or through contract provisions or bequests. The minormay be prevented from making premium payments. An irrevocable life insurance trust is a useful estate planning tool. The number of $10,000 annual gift tax exclusions may equal the number of trust beneficiaries. The trustee must not be directed in the trust document to purchase the policy nor may the donor retain any rights in the policy. Premiums may be paid from the trust principal, interest earnings, or subsequent gifts. The trust may use the proceeds at death to buy assets from or lend money to the estate to provide liquidity. These benefits, of course, should be reviewed carefully with your attorney and accountant. The result of these decisions may be a substantial estate tax savings and estate assets conservation. Tax reference verification 1-800-829-1040 Back