You should be aware that there is a difference between a life insurance policy held for family protection or retirement income and one that was acquired for estate tax liquidity. The latter should be held inside an irrevocable life insurance trust, so the proceeds won’t be included in your taxable estate. When you still have dependents, you should hold a life insurance policy yourself when it’s first acquired, for easier access. If necessary, you can tap the cash value via loans and withdrawals.
As time goes by and your wealth increases to the point where estate taxation is a concern, you can transfer the policy to a trust. As long as you live another three years, after the transfer, the death benefit will be outside of your taxable estate. Be sure to put a value on the policy, at the time of the transfer, and file a gift tax return. In 2002, you won’t have to pay gift tax on cumulative gifts up to $1 million.
