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When you buy life insurance, you’re providing financial security to your beneficiaries when you die. But you could also leave your loved ones with something else — a tax bill.

Death benefits from life insurance policies aren’t subject to income tax. But the benefits could be counted as part of your taxable estate if your estate’s value is high enough. If life insurance proceeds push your estate value above the exemption level, the government will hand your beneficiaries a big tax bill. That’s why it’s important to put together a financial plan when you have a life insurance policy — to ensure your heirs get the most significant inheritance possible.

An irrevocable life insurance trust is a tool that can help beneficiaries erase the tax burden. The trust owns your life insurance policy, pays the premiums, and gives the death benefit to your beneficiaries when you die. By placing ownership of the policy with a trust — not the insured — it removes the death benefit from your estate. If this drops your estate value below the exemption level, you’ve freed your beneficiaries from a big tax bill. The federal tax reform doubled the federal estate tax exemption. It is $12.92 million in 2023. 

Once you put your policy in the trust, it can’t be changed.

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Penny Gusner


Penny is an expert on insurance procedures, rates, policies and claims. She has extensive knowledge of all major insurance lines -- auto, homeowners, life and health insurance. She has been answering consumers’ questions as an analyst for more than 15 years and has been featured in numerous major media outlets, including the Washington Post and Kiplinger’s.