Bay Area Estate And Tax Planning Law Firm

What to know about life insurance trusts

On Behalf of | Jul 20, 2021 | Trusts |

California families have an exemption for their estate that keeps it from being subject to income taxes. However, above that $11.7 million, the estate tax bill could get large. This is why they need to take measures to reduce the size of their taxable estate.

Life insurance policies can be taxable above a certain amount

Some families have very large life insurance policies. These proceeds are usually not taxable, but that is because most families have estates valued under the exemption. If your estate is above the threshold, it could create a tax liability. The way to reduce that liability is to separate yourself from any control over the assets. You would do this by creating an irrevocable life insurance trust. You appoint and trustee and transfer the assets to the trust. They manage the money, and you have no decision making power. This removes it from your taxable estate.

Life insurance trusts could take care of your loved ones

Establishing a trust also means that your loved ones could be taken care of in the future. The trustee would manage the money responsibly, ensuring that your life insurance proceeds would be there in the future when your beneficiaries need it. The trustee would owe a fiduciary duty to the estate to act in its best interest and use reasonable care. This is especially helpful when you need a trust to care for a dependent with disabilities.

If you have a large estate where taxes are an issue, you should see an estate planning attorney. The lawyer could help you come up with a plan that could take care of your beneficiaries, even after you are gone. This could allow your family to relax and focus on other things besides financial arrangements.