Irrevocable Trusts are often created to own life insurance policies. The significant advantage is that the death proceeds are not included in the insured’s taxable estate upon his death. Further, the death proceeds are not taxable in the surviving spouse’s estate, even though she has access to the proceeds to maintain her lifestyle. Upon the second death, the proceeds pass tax free to the children or beneficiaries of the insured’s choice.
Consider this example: Dad and Mom have a taxable estate. They need life insurance in the event Dad prematurely dies. He purchases a $2 million policy. Upon the second death of Dad and Mom, if Dad owns the policy the children may receive only $800,000 because of 40% federal estate taxes. If Dad’s Irrevocable Trust is the owner and beneficiary of the policy, upon his death the proceeds are available for Mom, and at Mom’s death pass to the children estate tax free.
With 2017 federal estate tax exemption amounts of $10,980,000 for a married couple, not many taxpayers are concerned with estate tax. But for those exceeding $10,980,000, irrevocable insurance trusts are still a necessity.