Life Insurance Proceeds

If you own a life insurance policy, it is important for you to know that life insurance proceeds are subject to estate tax upon your death if you retain any powers over the policy (such as the right to change the beneficiary or borrow against the policy) or if the proceeds are made payable to your estate.

You can transfer a policy to certain life insurance trusts at least three years before you die, or you can give money to the trust to buy a new policy and pay the premiums. Under either method, the proceeds will be free from estate tax, although your initial gift and the premiums paid may be subject to gift tax. If the trust is properly structured, the insurance proceeds can still be available to meet the liquidity needs of your estate.