Can my spouse and children receive life insurance proceeds on my death free of income tax and federal estate tax?

Yes. If your spouse receives an outright distribution of the life insurance proceeds after your death, the proceeds will be received income tax-free and federal estate tax-free. However, any such proceeds remaining in your spouse's estate above his or her unused $600,000 exemption equivalent amount will be subject to federal estate tax. By placing the life insurance policy in an irrevocable trust, income and principal are provided for your spouse during his or her lifetime. The life insurance proceeds would be received in the trust free of income and estate tax. Upon the death of your spouse, the principal can be passed to your children estate tax-free.