Central New Jersey estate planning attorneys are always going to emphasize the importance of planning ahead even as a relatively young adult. One of the reasons is because of the fact that there are no guarantees and you never know exactly how long you will live. Unfortunately, people of all ages pass away every day and they leave families behind.
But in addition to protecting your family in the event of an unexpected catastrophic accident or illness planning ahead can provide certain logistic benefits. This is something to take into consideration when you are purchasing life insurance.
A lot of people are under the impression that life insurance proceeds are transferred outside of taxation but this is not entirely correct. Yes, it is true that the beneficiary of life insurance proceeds does not have to pay income tax on the proceeds. But, if you were the owner of the policies they are part of your estate for estate tax purposes.
On the other hand, if you were to create an irrevocable life insurance trust you could have the trust purchase the policies and the proceeds would no longer be considered to be a taxable portion of your estate.
A question arises: Can you transfer existing policies into such a trust? The answer is yes, but there is a caveat. If you were to pass away within three years of placing the policies into the trust the proceeds would in fact be subject to the estate tax. This is why it is better to plan ahead with foresight and have the trust purchase the policies in the first place.