Understanding Life Insurance Trusts
How to Reduce or Eliminate Your Estate Tax Cost
5. How does an insurance trust reduce estate taxes?
The insurance trust owns your insurance policies for you. Since you don't personally own the insurance or have any "incidents of ownership," it will not be included in your estate -- so your estate taxes are reduced.
Let's say you are married, with a combined net estate of $5 million, $1 million of which is life insurance. With a tax planning provision in a revocable living trust or will, you can protect up to $4 million in 2008 from estate taxes. But if you both die in 2008, your estates would have to pay $450,000 in estate taxes on the additional $1 million. With an insurance trust, the $1 million in insurance would not be in your estate. That would save your family $450,000 in estate taxes.