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    Can life insurance be used to pay estate taxes?

    Irrevocable life insurance trusts may provide a solution but cannot be altered

    Joel M. Blau, CFPJoel M. Blau, CFP Ronald J. Paprocki, JD, CFP, CHBCRonald J. Paprocki, JD, CFP, CHBC


    Does it make sense to use life insurance to pay estate taxes?

    A common dilemma faced by many high-net-worth physicians is that they don’t want their heirs to be burdened with estate taxes. So they take out a personally owned life insurance policy specifically intended to cover the tax bill upon their death. Unfortunately, the proceeds of the insurance policy wind up as part of the estate—thereby actually increasing the estate tax burden. The solution to this dilemma could be an irrevocable life insurance trust (ILIT).

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    Many estates are subject to estate taxes: either the federal estate tax, or an estate or inheritance tax levied by the state. If you expect that your estate will fall victim to taxes, consider using an irrevocable life insurance trust. Generally, life insurance proceeds are included in the gross estate for estate tax purposes. However, if the life insurance is held in an ILIT, the proceeds escape estate taxation.

    Even if an ILIT seems to make sense at first blush, you should not attempt to create an ILIT on your own given its many rules and guidelines. A comprehensive review of your estate and assets is necessary to determine whether an ILIT is the most appropriate estate-planning tool for your particular situation.

    Next: Couple of ways to create an ILIT

    Joel M. Blau, CFP
    Mr. Blau is chief executive officer of MEDIQUS Asset Advisors, Inc., in Chicago. He can be reached at 800-883-8555 or [email protected]
    Ronald J. Paprocki, JD, CFP, CHBC
    Mr. Paprocki is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago.


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