Who is the beneficiary of your life insurance? Without knowing it, it may be your favorite relative, Uncle Sam. Without considering life insurance, most people need not worry about federal estate tax since your estate must now exceed $5.49 million in 2017 (this is up from $5.45 million in 2016) to be subject to this levy. If you carry large amounts of life insurance, however, the insurance death benefit may force your estate over the year 2017 threshold of $5.49 million. This is certainly an undesirable result as the IRS will claim 40 percent of that amount over $5.49 million.

Because of these confiscatory rates, many attorneys advise you to keep life insurance out of your estate if the life insurance proceeds when combined with your other assets appear to exceed the $5.49 million trigger point. There are a few basic ways to prevent life insurance proceeds from being included in your estate for purposes of the federal estate tax. The easiest and most practical way is to never own it in the first place. That is, the insured party should not be the owner of the policy, but rather, the beneficiary should purchase and own the policy. If your beneficiary (such as your spouse or children) purchases the policy and pays the premiums, the death benefit should not be included in your federal estate. If your beneficiary cannot afford to make the premium payments, you may be able to give him the premium money. If you choose this route, make sure the premium money is placed in an unrestricted bank account titled in the beneficiary’s name; for if you pay the premium directly, the IRS will claim that you were the actual owner of the policy and, therefore, will include insurance proceeds in your estate.

If you already own the insurance policy, you should consider gifting it to your beneficiary. To make such a gift, you need only complete a short form provided by the insurance company.

The key, however, is to do it quickly, for if the transfer occurs within three years of your death, the proceeds will be included in your federal estate regardless of who actually owned the policy. To escape taxation, such a gift must be absolute. If, for example, you transfer the policy but retain the right to change beneficiaries or borrow the policy’s cash value, the proceeds will be included in your estate.

Irrevocable trusts can also be used to remove life insurance from your taxable estate as well as the estate of your spouse. This is explained in an article on life insurance trusts.

Another important rule of federal estate taxation that bears on life insurance is the 100 percent marital deduction. This rule means that even if you own the policy, not one penny of the proceeds will be subject to tax if your spouse is the beneficiary. That’s right, even if it is a ten million dollar policy, there will be no tax if your spouse is the beneficiary. Because of this so-called unlimited marital deduction, many advisers suggest that there is no need to change the ownership on a policy that names your spouse as beneficiary. This strategy may be sound if the insured spouse dies before the beneficiary spouse. If, however, the beneficiary spouse dies first, when the insured later dies and the proceeds are paid to other beneficiaries, no marital deduction will be available. As such, even where your spouse is beneficiary, it may still be advisable to change ownership of your policies.

Many of the rules of federal estate tax and life insurance are quite technical. Also, while some of the strategies may save taxes, they may not be acceptable from a personal standpoint. Suffice it to say, if your estate together with life insurance approaches the $5.49 million limit, you should be talking with your agent and your attorney about the best way to arrange your estate and your life insurance.