Trusts Spare Your Heirs

This is all about death and taxes -- the estate tax, to be precise, which is likely to remain a fact of life.

Oh sure, if you could plan your death for tax purposes, then you would consider 2010; thanks to a peculiarity of the last tax-cut package, there will be no estate tax that year. After that, the tax returns, and most pros believe it will remain in place in some form for, well, forever.

Therefore, you have no choice but to prepare for it. So consider putting a life insurance policy in an irrevocable trust as a way to ensure that your heirs will have enough money to pay that estate-tax bill.

For 2005, if your estate is worth more than $1.5 million ($3 million for a married couple) your heirs will owe estate tax on the overage. And unless they have big bucks lying around, they'll most likely use the money from your estate to pay the bill. So instead of handing Uncle Sam part of their inheritance, that irrevocable life insurance policy trust could be used to pay estate taxes.

Granted, many of us think of life insurance as something you pay for your whole life so that your spouse and kids have money to play with after you're gone. But if you have already amassed enough money to give to them upon your death, they probably don't need your life insurance proceeds in addition to everything else. So let them use the proceeds from your policy to pay those wicked estate taxes.

But it's imperative that your policy be in a trust. If not, the proceeds from the policy will be considered part of your estate when you die. You will then owe estate tax on that money and that defeats the whole point!

With your life insurance policy in an irrevocable trust, the proceeds become free of income and estate tax because the trust now owns the policy, says Bill Fleming, director of personal financial services at PricewaterhouseCoopers in Hartford, Conn.