As explained in a previous post, if the owner of a policy sets up a life insurance trust and changes the ownership and beneficiary to the trust, and a death occurs within three years of that change, the IRS will roll the clock back to original ownership and beneficiary. This could potentially put millions in estate value into a taxable situation.Â 

So what if you are stuck? On the one hand you have an estate planner telling you need life insurance for estate tax protection. On the other hand you have an estate tax attorney working at a snailâ€™s pace to put together an irrevocable life insurance trust, warning you not to buy life insurance until the trust is in place.Â 

Well guys, letâ€™s be real about the attorney. He is suggesting that you just chill until he gets around to your trust. If you happen to die next month, do you think he is going to step in and provide your heirs the millions they would have received if there was life insurance in force? Iâ€™m not thinking thatâ€™s not happening.Â 

Several companies have provided a vehicle for this very issue. It is an estate protection policy that, for the first four years, has double the death benefit. This allows time for even the slowest attorney to set up a trust, a change of ownership to the trust to be accomplished, and the three year look back period to expire. During that period the policy has built in the additional insurance to cover the larger estate value due to improper ownership of the policy.Â 

So, in real numbers, letâ€™s assume you have a $5mm estate. There is a $2.5 exemption which leaves $2.5mm taxable at about 50%. Estate taxes due, about $1.25mm, so the person takes out a $1.25mm policy with himself as owner. Unfortunately, because of the ownership, the life insurance gets added to the total estate rather than being there to pay the taxes.

So, reality is that he has a $2.5mm taxable estate and his life insurance adds $1.25mm leaving a taxable estate of $3.75mm. Taxes due are about $1.8mm. He has left $1.25mm in life insurance to deal with that bill. That means the heirs are liquidating about $600k of the estate to pay the remaining taxes. Not a desirable outcome.Â 

Scenario number two doubles the death benefit. He has $2.5mm taxable. He takes out a policy for $1.25mm with a double face amount for the first 4 years. Upon his death, the $2.5mm (double face amount)Â  is added to his estate, making the taxable estate $5mm. Taxes due $2.5mm, but remember, he has $2.5mm in life insurance to pay the taxes. Letâ€™s call that break even which is exactly the outcome you want.Â 

Bottom line. If estate tax life insurance is needed, it is needed now, not when your attorney gets around to creating your trust. There is more than one way to shine that pair of boots. Check with an independent agent who will have access to the companies that have this benefit.