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Don’t risk tax on life insurance proceeds: Set up a trust

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in Small Business Tax

Do you own a life insurance policy on your own life? If so, you could be asking for tax trouble. Reason: The proceeds from the policy will be included in your taxable estate unless you take action.

Strategy: Set up an irrevocable life insurance trust. Then transfer ownership of the policy to the trust. Accordingly, the life insurance proceeds are removed from your estate, perhaps saving your family tens or even hundreds of thousands of estate tax dollars.

This technique is typically used for an existing life insurance policy, but it also works if you have the trust purchase a new policy on your life (or the lives of you and your spouse).

Here’s the whole story: If an individual possesses any “incidents of ownership” in a life insurance policy on his or her own life—for instance, he or she has the power to change beneficiaries, borrow against the policy, or cancel it—the proceeds are included in the individual’s estate for fe...(register to read more)

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