Planning Your Estate to Maximize Tax Benefits

Planning for your future is a necessary part of getting older; a comprehensive financial plan to maximize tax benefits can help you make the right investment decisions to maximize your estate’s profit. It’s not uncommon for individuals to insure themselves under a life insurance policy with high death benefits that sometimes amount into the millions. Once you add death benefits to the value of your home, your savings, retirement accounts, and other belongings, you might be surprised at the collective value of your estate. If you factor in years of growth, some individuals might be looking at unforeseen issues with estate taxes.

Working with an insurance professional to maximize your life insurance policy’s potential can help your beneficiaries avoid hefty taxes in the future and optimize your estate’s full value.

How Life Insurance Benefits Can Be Taxed

One of the biggest benefits of owning a life insurance policy is the ability to generate a large sum of money that is payable to your heirs upon your death. This helps your beneficiaries settle your affairs, resolve any debts that need to be addressed, and cover any of your funeral expenses. An even greater advantage: life insurance proceeds receive a federal income tax-free benefit when they are paid to your beneficiary. There is a catch, however: while the proceeds are free from income tax, they may still be included as part of your taxable estate for tax purposes. Working with a tax or insurance professional can help you take steps to minimize this effect. The most efficient way to avoid federal taxation on your life insurance proceeds is to transfer ownership of your policy to another person or entity.

Life Insurance Trusts

One way to remove life insurance proceeds from your taxable estate is to create an irrevocable life insurance trust (ILIT). Your life insurance policy will be transferred to a trust and you will no longer be considered the owner. Therefore, the proceeds will not be included as part of your estate.

Choosing to transfer the ownership of your policy to a trust rather than to another individual will give you some options. You might wish to retain some legal control over your policy. You can also ensure that all premiums are paid promptly.

If the beneficiaries of the proceeds are minor children from a previous marriage, an ILIT will permit you to name a trusted family member as trustee; they will be able to handle the funds for your children under the terms of the trust document.

Ownership Transfers

Rather than transferring ownership of your policy to a trust, you can transfer ownership to another person. There are some guidelines to keep in mind when considering an ownership transfer:

  • Choose a competent and trustworthy adult to be the new owner (it can be the policy beneficiary, though this is not completely necessary)
  • The new owner must pay the premiums on the policy. However, you can gift up to $15,000 per person in 2021; you can gift these funds to the new owner to use towards premiums without getting taxed.
  • Ownership transfer is an irrevocable event: when planning to name the new owner, be wary of divorce situations.
  • Upon transferring ownership, you will give up all rights to make future changes to this policy. However, if a family member, child, or friend is named the new owner, they can make changes to the policy at your request.
  • Work with your insurance company to ensure you have written confirmation to prove the change in ownership and to finalize any necessary forms.

Reach Out to Us Today To Maximize Tax Benefits

Daigle and Travers is an experienced life insurance company serving the people of Connecticut. Our two convenient locations in Darien and Westport are here to help you maximize your life insurance benefits and optimize your estate plans. Reach out to our professionals today to schedule an appointment and learn more! We can be reached at 203-655-6974 or by emailing