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Practical options for ownership of your life insurance

Several factors may come into play that could undermine the
financial security provided by the proceeds of a life insurance policy.

Beyond estate taxes, there is the potential for probate,
gift taxes, financial mismanagement, and misuse. Proper planning is necessary
to help avoid these threats.

Other than owning the insurance yourself, there are three
practical options for the ownership of your life insurance:

If you choose your spouse to be the owner and beneficiary of
a policy on your life insurance, the proceeds of the policy may be subject to
estate taxes and perhaps probate administration when he or she eventually dies.
In addition, he or she will be responsible for investing the proceeds of your
policy. Make sure your spouse is prepared and has the willingness to handle
these additional responsibilities.

Naming a child as owner and beneficiary can lead to problems
if the child lacks the experience for such a designation. You must be able to
rely on him or her to maintain the policy and avoid letting the policy lapse.
In addition, because your child will be the legal owner of the policy proceeds,
you must be sure that he or she will be willing to supply necessary funds to
the estate to settle taxes, fees and other expenses.

An irrevocable life insurance trust can help avoid threats
to your policy’s proceeds. An ILIT is irrevocable and cannot be changed once it
has been created. An insured individual contemplating the use of an ILIT must
be willing to relinquish control of the assets transferred to the trust and
must recognize the limitations that arise as a result.

The insured may not retain the right to revoke, alter, amend
or terminate the Trust, meaning that the insured may not retain the power to
change the trust beneficiaries and their interests. Likewise, the insured
cannot require that assets contributed to the trust be used to pay premiums or
otherwise maintain life insurance owned by the trust. Finally, the insured may
not retain any economic benefit in the life insurance policy.

Because the designated trustee must manage the trust for
your benefit, it helps ensure the availability of liquid funds when they are
most needed. And because the trust is irrevocable and is the owner and
beneficiary of your policy, the proceeds escape estate taxes in most cases. The
trust arrangement allows the proceeds to avoid costly probate administration
and can sanction the professional management of the proceeds to help ensure the
livelihood of your survivors.

Keep in mind that the cost and availability of life
insurance depend on factors such as age, health and the type and amount of
insurance purchased. Before implementing this strategy, make sure that you are
insurable.

The use of trusts involves
a complex web of tax rules and regulations. You should seek the counsel of an
experienced estate planning professional before implementing such a strategy.