18 Sep Is life insurance part of my estate?

Q. Should life insurance be included in one’s estate?
— Planning ahead

A. Estate planning can be confusing because certain assets are treated differently.

Life insurance can be a handy tool — as long as you understand how it’s taxed.

There are generally three scenarios under which life insurance proceeds are included in a taxable estate, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.

The proceeds would generally be included in the taxable estate if the life insurance proceeds are payable to the estate, if the deceased person possessed an “incident of ownership” in the life insurance policy or if the ownership of the policy was transferred within three years of death.

“An incident of ownership means that the deceased person either owned the policy or had the right to assign or terminate the policy, designate or change beneficiaries or borrow against the cash value,” Whitenack said.

If you want to exclude life insurance proceeds from your estate, one strategy is to establish an irrevocable life insurance trust, commonly known as an ILIT.

“When an ILIT purchases a life insurance policy, the proceeds are not included in the taxable estate,” Whitenack said. “When an existing policy is transferred into an ILIT, the proceeds are not included in the taxable estate if the transfer took place more than three years before the death of the policy owner.”

If you’re considering this strategy, or you want to see what else you can do to lower your taxable estate, it’s time to call an estate planning attorney.

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This post was originally published in September 2017.