The main goal of a life insurance trust is to reduce or eliminate estate taxes. For those who have a large life insurance policy, the worry is that the life insurance policy will pay out into the estate, increasing its size – and the possibility that the estate may owe estate taxes. This is where employing an life insurance trust is most beneficial.
However, very few estates will owe estate taxes. For deaths in 2016, the estate tax exemption is $5.45 million. (This exemption amount will rise each year to adjust for inflation.) Only estates larger than the exemption amount may owe federal estate tax – so you don’t need to worry about making a life insurance trust unless you think that your life insurance policy will bring the size of your estate into that range.
Some states also levy estate and inheritance taxes. And the exemption rates on those taxes can be lower than the federal exemption. So while your estate may not be big enough to trigger federal estate taxes, if you live in one of the states with state estate or inheritance taxes, your estate may still owe taxes to the state. Find out whether your state is one of those with State Estate Taxes.