Life insurance is not entirely “tax-free.” While death benefit proceeds are income-tax-free, they are not estate-tax-free unless the beneficiary is a spouse.
Life insurance can be an essential component of estate plans for same-sex couples as it is often an effective way to provide liquidity to satisfy any estate taxes due as a result of the absence of the marital deduction. Unless it is structured properly, however, the life insurance proceeds themselves may be taxed.
An effective technique to avoid this tax is to create an Irrevocable Life Insurance Trust (ILIT) which will own the policy and direct the distribution of the proceeds at death, leaving the gross proceeds available to satisfy estate taxes and provide support for the surviving partner.
If you or a family member need assistance with living trusts call me at (716) 333-5144.
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