For years 2006, 2007 and 2008 , the applicable exclusion amount for the federal estate tax will be $2,000,000. This means that if you are married, you may not even be subject to the federal estate tax if your gross estate does not exceed $4,000,000.
Of course, you must each tax advantage while you are alive of this exclusion. You may want to consider a trust that will permit you to take advantage of this.
That said, if you name your children as the owners of the contract, they are the ones that actually have to pay for the policy. You can gift them the money to pay the premium but you can not have any incidence of ownership otherwise it WILL be included in yopur gross estate. If you are the insureds, how can you be the beneficiaries too. It would defeat the purpose to have the death benefit go back into your estate...subjecting it to possible estate taxes.
If you want/need life insurance to pay potential estate taxes, there are a couple of ways to do it.
1. Have your children own and be beneficiaries of the life policy. You and your spouse can gift them $12k each per year ($24k total, $48k if they have a spouse). This gift is not subject to any gift tax either...it is the annual gift tax exclusion ($1 mill lifetime). (In fact you can gift $12k to anyone...even me!). This annual gifting approach also helps to reduce your taxable estate.
2. Open an Irrevocable Life Insurance Trust (ILIT). An irrevocable trust is one in which the grantor completely gives up all rights in the property transferred to the trust, and retains no rights to revoke, terminate or modify the trust in any material way.
Here is how it GENERALLY works:
The grantor transfers a life insurance policy to the trust (or preferably, the trustee applies for a new policy, thereby avoiding the possibility that the policy would be included in the grantor's gross estate).
The grantor transfers cash annually to the trust which can be sheltered from the gift tax by the gift tax annual exclusion, through the beneficiary's Crummey power.
The trustee makes premium payments.
At the grantor's death, the trust receives the death benefit from the policy.
I'm sure that others can provide alternative ways to reduce or eliminate your potential estate tax but I hope this helps anyway.
Stu
