Legal Blog

The Weekly Scenario: Life Insurance Proceeds

Question: How are the death proceeds paid to an Irrevocable Life Insurance Trust used by an estate to pay estate taxes?

 

Answer: When life insurance proceeds are paid to a life insurance trust, there are generally two ways for the trustee to use the cash to pay estate taxes.

One way is for the trustee to use the cash in the trust to purchase assets from the estate.  The trust will then own the nonliquid assets (generally) and the estate will have cash to pay the taxes.

Alternatively, the trustee can lend the proceeds to the estate and take back a promissory note.

If the trustees are required by the terms of the Will to use the life insurance proceeds to pay estate taxes, the amount of proceeds required for payment of such debts and taxes is includable in the insured’s gross estate, whether or not the proceeds are actually used for such purposes.  Therefore, instead of requiring insurance proceeds to pay the taxes, the better way of ensuring that the proceeds are available to pay estate taxes is for the trust agreement to allow the trustee to make loans or buy assets for the estate.

As always, if you have any questions or would like to learn more, please contact me at sshane@offitkurman.com or 301-575-0313.

ABOUT STEVE SHANE

Steve Shane Casual SmallSteve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

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