Q&A: Accessing trust proceeds for estate taxes

June 18, 2010

Life insurance proceeds paid to an irrevocable life insurance trust may escape estate taxation if the trust owns the policy and you have not retained any incidents of ownership, such as the right to change the beneficiary.

Q: The death benefit from insurance on my life will be paid to an irrevocable life insurance trust (ILIT). What if those funds are needed to pay my estate taxes?

Generally, life insurance is purchased in a trust to provide liquidity at death void of estate taxes. To keep the death benefit from being estate-includable, you cannot require the trustee to use the proceeds to meet estate settlement costs.

Send your money management questions to medec@advanstar.com (please include your regular postal address). Answers to our readers' questions were provided by Leslie Thompson, CFA, CDFA, CPA, partner, Spectrum Management Group, Indianapolis, and Carlo Panaccione, principal, Navigation Group, Redwood Shores, California.