Gifting Life Insurance: Using Permanent Policies for Annual Gift Tax Exclusion
Permanent Life Insurance policies can be an effective vehicle for wealth transfer by utilizing the annual federal gift tax exclusion. This strategy is essential for minimizing the taxable estate and ensuring tax-efficient asset transfer to heirs.
The Gift Tax Exclusion Mechanism
Under U.S. tax law, an individual can gift a certain amount each year (indexed for inflation) to any number of people without incurring gift tax or affecting their lifetime exemption. This exclusion can be used to fund a permanent policy in two ways:
- **Premium Payments to a Trust (ILIT):** The donor gifts cash to an Irrevocable Life Insurance Trust (ILIT), which then pays the premiums. The ILIT uses “Crummey” withdrawal powers to qualify these gifts for the annual exclusion.
- **Gifting a Policy to an Adult:** A policyholder can gift an existing policy to an adult child or grandchild, and the policy’s value at the time of the gift qualifies for the exclusion.
When structured correctly, the death benefit bypasses the insured’s taxable estate entirely.
Disclaimer: This content is for informational purposes only and is not financial or legal advice. Gifting life insurance is a complex strategy; consult an estate planning attorney for compliance with gift tax regulations.