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Certain trusts can help pay for estate taxes

For some District of Columbia residents, how to pay for estate taxes is a priority. Some people use irrevocable life insurance trusts to accomplish this goal. A life insurance policy is purchased and then placed into the trust. The amount of the death benefit is equal to the expected amount of taxes that will be owed on the estate.

In order to receive the maximum benefit from the trust, it should be created and funded first. Then, the trustee can purchase the policy. That way, the trust owns the policy on your life, and its death benefit will not be added to your estate. An existing policy can be gifted to the trust, but if the cash value is over the current federal limit for tax free gifts, taxes may be due. However, if you die within three years of the transfer, the IRS will still add the death benefit to your estate.

It is important to keep in mind that the trust is not revocable. That means that, once it is done, it cannot be undone. In addition, the trustee of an irrevocable life insurance trust has to be someone other than the person whose life is insured. 

There are a myriad of different trusts that can meet the goals of a District of Columbia resident -- this is just one of them. As long as this type of trust is created, funded and administered in accordance with the existing laws and regulations, it can be a useful tool for estate planning. An attorney can review your circumstances, discuss your goals and advise you on the best course of action to create an estate plan with which you are satisfied.

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