Insurance Trusts

By Jean Chatzky, Author of Talking Money, Everything You Need To Know About Your Finances and Your Future.

You probably know who's set to benefit from your life insurance policy. But have you thought about who owns it? The question is important, because while life insurance payouts aren't subject to income taxes, if you own the policy you took out on your own life, then it's considered part of your estate--and will be taxed that way.

If your beneficiary is your spouse, no taxes will be paid o the first death--because everything moves from one spouse to another tax free (though you'll want to make sure you have marital trusts established to protect your unified credit). But if you're single, or if the second spouse in a couple dies, things get expensive.

The solution is to make sure that you don't won your own life insurance policy, but that instead it's owned by an irrevocable life insurance trust. If you're thinking ahead, you can have the trust buy the policy in the first place.

You can name the beneficiary, but the policy will never be part of your estate. Or, if you've already purchased a policy, you can transfer ownership of that policy to an irrevocable trust. Do it sooner rather than later. You have to live three years beyond the transfer for it to be considered valid. If you die before the three years are up, the policy will move back into your estate and will be taxed that way.

Author Biography: Jean Chatzky, author of Talking Money, Everything You Need to Know About Your Finances and Your Future, appears weekly on NBC's the Today show, twice weekly on MSNBC, and writes a monthly column on the back page of Money magazine, the nation's leading personal finance magazine with nearly two million subscribers. She is also a frequent contributor to USA Today.

Finance Topic of the Month: Why Is It So Hard To Get Out Of Debt?