Do you have a large life insurance policy? When you are the sole or primary provider in your household, it is important to have a life insurance policy equal to at least your final expenses and one year of your household expenses. Most people have a life insurance policy of at least $100,000, and while that might not seem like much it can definitely make a difference when it comes to settling your estate.
New Mexico does not levy an estate tax, and the federal government has temporarily exempted estates under $12.06 million from these taxes. Barring new legislation, after 2025 the tax code will levy the estate tax on estates of at least $5 million for individuals or $10 million for couples, so you should plan ahead for the change. Depending on policy amounts and other financial assets you may have, lumping the insurance in with the rest of your estate could cause it to be taxed where otherwise it would not be.
What is an Irrevocable Life Insurance Trust?
An irrevocable trust is one that cannot be changed after it has been established. In this case, the irrevocable life insurance trust is one that is named as the owner and beneficiary of your life insurance policy. Directing the life insurance proceeds into such a trust and naming specific beneficiaries keeps your life insurance benefits from being included in your estate.
When you want special conditions to apply to the proceeds of the life insurance policy, an irrevocable life insurance trust acts as beneficiary of the proceeds, and the trust document then directs how, to whom, and when the proceeds are distributed according to your wishes. This is a good way to make sure that your ultimate beneficiaries receive their shares as you intend.
Top Reasons Not to Name a Living Trust as Beneficiary of Life Insurance
As you are consolidating your financial assets into a revocable living trust, naming that trust as the beneficiary of the policy may make sense – but it isn’t right for everyone. Smaller estates in which there is no fear of federal estate taxes may have nothing to worry about, but if you have a large life insurance payout it could tip the scales and make your estate subject to federal estate tax. Also, while the revocable trust may track your wishes regarding how your general wealth is distributed, you may have different specific goals for the life insurance policy proceeds.
By directing insurance proceeds into an irrevocable life insurance trust, you can shelter the proceeds from potential estate tax consequences while maintaining control over what will happen to the proceeds after your death. While not everyone needs a separate life insurance trust, it is an estate planning tool that should be considered during the design of your plan.
It takes an experienced and knowledgeable estate attorney in New Mexico to determine if your life insurance should be kept in a different trust. Contact us today for a consultation.