Do you have a life insurance policy? If not, this might become an important aspect of your estate plan as it provides for a seamless transfer of policy benefit payouts to your chosen beneficiaries.
Unlike many probated assets, life insurance is handled outside of the courts when it comes to transferring the funds to your beneficiaries. For that reason, your beneficiary forms should always reflect your most up to date decisions around who should receive your life insurance policy proceeds, since these forms would override anything you have on file in your will.
So how do you best incorporate life insurance into your overall estate? You can have a policy stand alone, but you might choose to make it owned by an irrevocable trust instead.
The term irrevocable often comes up in the context of estate planning. Irrevocable means that you cannot make any changes to this tool or plan after you have established it. Many areas of your estate plan can be adapted over time, such as your will and your beneficiary designation forms.
However, there can be some circumstances where an irrevocable trust or an irrevocable life insurance trust might be the preferred tool. Life insurance that is controlled or owned by an insured individual is included in a decedent’s estate. Whether or not the policy or proceeds are subject to estate taxes will depend on the state where you live and the size of the policy.
The death tax threshold at the federal level is currently $11.58 million per individual. In Massachusetts the death tax begins when assets reach $1 million per decedent. One way to avoid having your life insurance policy in Massachusetts included in your estate is by having the life insurance policy owned by an irrevocable trust with an independent trustee that is a party other than the insured individual.
This means that the policy can be excluded from the insured’s estate for estate tax purposes. It is important to understand that there are specifics that must be included in this type of plan. Make sure that you have consulted with a dedicated estate planning professional in Massachusetts to determine what’s most appropriate for you.
