There may be good reasons why you shouldn't own your life insurance policy. If you die owning your life insurance, the proceeds from the policy will be included in your estate. If you leave your entire estate to your spouse, the insurance proceeds, along with the rest of your estate, won't be subject to estate tax. But the insurance money eventually could be taxed in your spouse's estate. If you don't leave your estate to a surviving spouse, the insurance proceeds could be subject to immediate estate tax.

One way to keep life insurance proceeds out of your estate is to put your insurance policy in an irrevocable trust while you're still alive. At your death, the policy proceeds would be paid to the trust, and your spouse could draw income from the trust for life. When your spouse passes away, the trust would dissolve and distribute its assets to your children or other heirs, free of estate tax.

Another way to keep life insurance proceeds out of your estate is to have another person own your life insurance – your spouse or your child, for example. However, having a trust or other individual own your life insurance policy means you lose the right to change beneficiaries, or to assign, cash in, or borrow against the policy.

If you currently own your policy, there could be gift tax consequences in changing the ownership. Consult us and your attorney for assistance in deciding the best strategy in your particular situation.

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