Irrevocable Trust For FEGLI Life Insurance Policy Benefits?
Irrevocable Trust For FEGLI Life Insurance Policy Benefits?
Federal employees automatically get enrolled into Federal Employees’ Group Life Insurance (FEGLI) and are provided life insurance coverage through their federal employment and then into retirement.
But the thing that most federal employees don’t plan for is what happens if and after they die while covered by a FEGLI policy, and how to maximize the benefits for the designated beneficiaries.
For starters, you should know that FEGLI Life insurance proceeds are not considered taxable income for the recipients for personal income tax purposes. However, the interest they will earn on FEGLI proceeds is reportable as income for Federal Income tax purposes.
Then there’s the issue of estate taxes (if applicable) and other things like probate, gift taxes, creditors, mismanagement, etc. that your FEGLI life insurance proceeds might create for your designated beneficiary or beneficiaries.
Through a little bit of savvy planning and assistance from a tax expert or estate planner, you can save your beneficiaries from being hit with all kinds of fees and taxes that reduce the net FEGLI benefit they will get after your death.
How an Irrevocable Trust Helps Safeguard Your FEGLI Life Insurance Policy Benefits
One thing that can take care of all such issues is an irrevocable life insurance trust. Since the trust is the owner and designated beneficiary, it avoids being a part of your estate and will not be subject to estate taxes and probate administration. The trust can be set up in a way that it then makes use of the funds to provide benefits for your family members or other beneficiaries.
It’s a simple and rock-solid arrangement that ensures availability of FEGLI life insurance proceeds as soon as the claim is approved by OFEGLI, while at the same time maximizing the subsequent benefits to your beneficiaries and protecting the proceeds from others.
Note that establishing a trust and keeping it operational involves certain upfront costs and ongoing administrative fees. You should discuss this with your tax advisor before taking any further steps.