A Quick Hit on Life Insurance Trusts

Life insurance is a countable asset for both estate tax purposes and Medicaid/Title XIX purposes. Medicaid allows an applicant to own up to $1,500 of cash value in a life insurance policy. All other cash value increases the Medicaid penalty period. After death, the proceeds of a life insurance policy are included on an estate tax return if the policy was owned by the insured. This can result in significant estate tax consequences when the value of the estate exceeds the estate tax exemption.

However, a good estate planner can create an instrument which will avoid those taxes and protect your life insurance from Medicaid: a life insurance trust. A life insurance trust is irrevocable. This means that the person who is insured is not the owner. The trust acts as owner and beneficiary on the life insurance policy, meaning that the life insurance proceeds are completely outside the estate. Furthermore, since the life insurance trust is the owner of the policy, the cash value is not counted as an asset of a Medicaid applicant.

Life insurance trusts have many other purposes as well, including protection of business assets, with a separate fund of cash or pre-planning for funeral costs like in our Funeral Planning Trust. Ask your attorney if a life insurance trust is right for your estate plan.

------------------

Lawyer Joke of the Day:

The New York Times, among other papers, recently published a new Hubble Space Telescope photograph of distant galaxies colliding.

Of course, astronomers have had pictures of colliding galaxies for quite some time now, but with the vastly improved resolution provided by the Hubble, you can actually see the lawyers rushing to the scene.