Life insurance is an integral part of any estate planning strategy because it provides for two important contingencies after you are gone. Death benefits offer your heirs financial security at a time when they need it most, and a revenue source they can draw from to meet their financial obligations.

Life insurance can also add a substantial amount of wealth to your estate, which could result in your assets being greater than the applicable exclusion amount. However, there are ways you can remove life insurance proceeds from your estate, and still provide your heirs with money for their financial needs.

Policy benefits are dependent upon incidents of ownership. That means the right to maintain control over the policy, or to receive monetary benefit from the policy belongs to the policy owner. If you want to shield policy proceeds from estate taxes, you cannot have held any incidents of ownership in the policy during the three-year period prior to your death.

The following list includes examples of rights that would be considered incidents of ownership. The right to:

· Surrender the policy

· Pledge the policy as collateral

· Assign the policy and any reversionary interest equal to 5 percent or more of the value of the policy before death

· Act as a fiduciary of a trust that holds insurance on your life if you established the trust

· Transfer the policy or consideration for the policy to the trust

· Exercise any fiduciary power over the trust for your own benefit

Keep in mind that your estate will not necessarily include your life insurance proceeds just because you were the purchaser or you paid the policy premiums within the three years preceding your death. Conversely there are instances in which policy proceeds were included in an insured’s taxable estate even though the insured was never named as the policy owner. In actuality, the application of the incidents of ownership rule is not always as clear-cut as insureds might wish.

There are some steps you can take to be sure your life insurance isn’t considered part of your estate:

· Have another entity, such as your adult child or an irrevocable trust you created, be the initial applicant and owner of the policy.

· Transfer any incidents of ownership in an existing policy to another person at least three years before your death. Your estate cannot be the beneficiary of the policy, and the policy beneficiary cannot be required to use the proceeds to pay estate expenses.

Estate planning is an extremely complicated issue. It’s a good idea to consider all of the alternatives, and seek advice from an estate planning professional before taking any action that might affect your policies.

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