FAQ:

Can life insurance be used to pay estate taxes?

Life insurance which is owned by you will be included in your estate for estate tax purposes. Therefore, although life insurance can be used to provide liquidity to pay taxes, the life insurance proceeds themselves will be taxable unless you do not own the policy at the time of your death.

The ideal way to use life insurance proceeds to pay taxes, but still maintain some degree of control, is to use an Irrevocable Life Insurance Trust (ILIT). The ILIT can own policies on your life. Premiums are paid by the trustee with gifts you make to the ILIT. Because the ILIT is an irrevocable trust and you do not own the policy personally, the death benefits maybe excluded from your taxable estate. This means that the entire death benefit can provide the liquidity to your estate to pay taxes. The use of an ILIT can be a very effective and economical way to pay estate taxes with non-taxable dollars.

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