life insurance, trusts and taxes

[artms]

this comes under the heading of a little knowledge is dangerous. in funding a trust, i am asked to include life insurance. i understood that in california death benefits are not taxed. if it is however placed in a trust does it become part of the estate and therefore taxable upon death. so my question is....should it be in the trust or kept out and if it is in the trust who should own it and who should be the beneficiary?

should retirement also be in the trust and is that taxed?

a bit more info, I think our assets mostly in real estate dictate an a/b trust. life insurance benefits increase the estate value, hence my concern.

tyou,
artms

 

[ALawyer]

Yes, a little knowledge can be dangerous, but thus far all I see is confusion.

For Federal estate tax purposes, all one's property PLUS the face value of life insurance which the deceased had any incidents of ownership over -- that usually means some element of control -- at death or within 3 years of death constitutes his or her estate.

It makes no difference if you name a child or a trust as beneficiary for estate tax purposes. (Of course if you name your spouse, there is a 100% marital exclusion on YOUR death).

The first $1 million (and that will increase in coming years) is free of estate tax. Wit an A-B Trust a married couple can shield $2 million from estate tax. If you have a very large estate, and the life insurance payable at death aspect will only add to what is or will be a larger taxable estate and increase the tax bite, placing the policy into a life insurance trust may be helpful (if you live 3 years). Taking out a new one in a life insurance trust from day 1 gets the money to your beneficiaries tax free, thru a trust or otherwise.

 

[artms]

Confusion is definitely a better word for it.

Suppose you are setting up your trust to include life insurance , you suspect that over time the value of assets will increase and you don't want the death benefits to add to the estate.

Would it be prudent to have the heir own the policy on the parents, making the survivng spouse, then the children themselves the beneficiarie?. This would remove the parents as owners and thus remove the benefits from the estate. That way if both parents should die at the same time the money would go directly to the heirs and would not be taxed.

Also, if that's case and the policy is really owned by the heir, should it not be included in the trust. (a little thinking out loud here)

artms