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What are the income, estate, and gift tax consequences of a life insurance trust?

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What are the income, estate, and gift tax consequences of a life insurance trust?

Question: What are the income, estate, and gift tax consequences of a life insurance trust?

Answer: If you set up a life insurance trust first and foremost it must be irrevocable so when you transfer property into the trust it qualifies as a taxable gift. There are provisions typically within the trust to allow the beneficiaries to make withdrawals, is called a crummy power right of withdrawal and so that’s an important consideration in order for the gift not to be treated as a taxable gift for the estate and gift tax purposes. For income tax purposes, the life insurance trust can be structured in a way so that the income will continue to be taxed to the grantor of the trust, even though it is an irrevocable trust, for estate tax purposes. You need to work with your attorney to set up that provision in your life insurance trust to get those special income tax rules to apply to the irrevocable life insurance trust. If you have accomplished the establishment of the irrevocable life insurance trust in the proper way so that you do not retain an insaneness of ownership and that the trust is kept out of your estate, then for estate tax purposes upon your death the proceeds from the life insurance policy can be transferred to your heirs, the beneficiaries of the trust, without any estate taxes.


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