Jimmy McMillan

Licensed Life Insurance Agent

Jimmy McMillan is an entrepreneur and the founder of HeartLifeInsurance.com, an independent life insurance brokerage. His company specializes in life insurance for people with heart problems. He knows personally how difficult it is to secure health and life insurance after a heart attack. Jimmy is a licensed insurance agent from coast to coast who has been featured on ValientCEO and the podcast...

Licensed Life Insurance Agent

Heidi Mertlich

Licensed Life Insurance Agent

Heidi works with top-rated life insurance carriers to bring her clients the highest quality protection at the most competitive prices. She founded NoPhysicalTermLife.com, specializing in life insurance that doesn’t require a medical exam. Heidi is a regular contributor to several insurance websites, including FinanceBuzz.com, Insurist.com, and Forbes. As a parent herself, she understands the ...

Licensed Life Insurance Agent

UPDATED: Dec 4, 2023

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It’s all about you. We want to help you make the right life insurance coverage choices.

Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance provider and cannot guarantee quotes from any single provider.

Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from top life insurance companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.

UPDATED: Dec 4, 2023

Advertiser Disclosure

It’s all about you. We want to help you make the right life insurance coverage choices.

Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance provider and cannot guarantee quotes from any single provider.

Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from top life insurance companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

UPDATED: Dec 4, 2023Fact Checked

One of the primary and simplest questions most people have about their life insurance policies is how much of the money they have paid premiums on will actually end up in the hands of their beneficiaries. The answer to this question depends on many factors, but one thing that can take a huge bite out of life insurance premiums is inheritance tax.

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What is the Inheritance Tax?

Inheritance, or estate, tax is the federal tax imposed on the estate of a deceased person. While the current limits for exemption are fairly high, a large life insurance policy can quickly push the total assets of the estate over the limit and cost the beneficiaries a great deal of money.

Inheritance tax is only assessed on life insurance proceeds that are part of a deceased person’s estate. This situation exists when the owner of the policy and the deceased person are the same individual. If the owner of the policy is a different person from the deceased, the policy proceeds are not part of the estate, and are therefore not subject to federal inheritance taxes.

How to avoid the Estate Tax with a Life Insurance Trust?

There are several ways to achieve this ideal situation. One way is to transfer ownership of insurance policies to a person other than the insured. However, this must be done at least three years prior to the death of the insured, or inheritance tax may apply.

Another way to ensure that beneficiaries are not assessed inheritance tax is to set up a life insurance trust. A trust transfers ownership of the life insurance policy to the trust itself, thereby avoiding inheritance taxes.

A trust exempts the face amount of the policy from your estate, and this can save you considerable amounts in estate taxes. For example, if you have an insurance policy which inflates the value of your estate by one million dollars, and if all of that insurance is subject to tax because it is outside the exemption limit, your heirs might have to pay up to $350,000 in inheritance tax. However, if that life insurance policy resides in an insurance trust, no taxes would be assessed.

It is also important to remember that most states have their own inheritance tax statutes, and these may apply even if no federal tax is due. A trust may help shelter your insurance proceeds from state as well as federal taxes.

A life insurance trust has three entities—a grantor, a trustee, and a beneficiary. The grantor is the person whose life is insured. The trustee is the person managing the life insurance trust and paying the premiums on the policy. The beneficiary is the person to whom the proceeds of the policy will go after the death of the insured.

The grantor, or the insured person, cannot be the same person as the trustee. There are several reasons for this. First, the grantor must not be the owner of the policy if inheritance tax is to be avoided. Second, the trustee will administer the distribution of the proceeds, so the trustee must survive the grantor. Finally, the trustee must be comfortable with the financial and legal aspects of administering a trust. Often, grantors choose a corporate trustee, such as a bank or other professional organization, to administer the trust.

There are several advantages to having an insurance trust as compared to simply assigning your policy to another individual. If the individual to whom you assign the policy dies before you, the proceeds of the policy will be incorporated into that person’s estate, effectively canceling the benefit of the reassignment for tax purposes. Another reason a trust may be preferable is that if you assign a policy to another individual, and that individual makes changes to the policy, you have no control over the new terms. The owner of the policy could borrow against it, change beneficiaries, or make other material changes to the life insurance policy, all without your consent.

On the other hand, a life insurance trust outlines the terms of the policy, the beneficiaries, and other important factors affecting the policy. However, it is important to remember that most life insurance trusts are irrevocable, so once a trust is set up, you cannot make changes or cancel the trust.

One other factor to consider when setting up an insurance trust is gift tax. Under federal law, individuals can “gift” or give without tax consequences up to $11,000 per year. This amount can be paid into the trust for payment of insurance premiums without tax consequences. However, if you pay the premiums outright, taxes may be applicable. It is important to talk to a professional financial advisor to explore all options and tax consequences as even the information above is often subject to change.

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Jimmy McMillan

Licensed Life Insurance Agent

Jimmy McMillan is an entrepreneur and the founder of HeartLifeInsurance.com, an independent life insurance brokerage. His company specializes in life insurance for people with heart problems. He knows personally how difficult it is to secure health and life insurance after a heart attack. Jimmy is a licensed insurance agent from coast to coast who has been featured on ValientCEO and the podcast...

Licensed Life Insurance Agent

Heidi Mertlich

Licensed Life Insurance Agent

Heidi works with top-rated life insurance carriers to bring her clients the highest quality protection at the most competitive prices. She founded NoPhysicalTermLife.com, specializing in life insurance that doesn’t require a medical exam. Heidi is a regular contributor to several insurance websites, including FinanceBuzz.com, Insurist.com, and Forbes. As a parent herself, she understands the ...

Licensed Life Insurance Agent

Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.