Irrevocable Life Insurance Trusts
One Estate Planning Technique You Should Consider If You Will Pay High Estate Taxes
To be a reliable estate planning device, life insurance policies should be held by an “Irrevocable Life Insurance Trust (ILIT)”. Life insurance policies should not by held by the insured or the insured’s spouse. If a life insurance policy is held by an “Irrevocable Life Insurance Trust” profits payable at the insured’s death go to the trust. The benefactor and benefactor’s partner will not be assessed estate taxes on policy profits.
PAY LESS TAX AND PROVIDE A BETTER SURVIVOR BENEFIT FOR YOUR CHILDREN OR GRANDCHILDREN
In the estate preparation context a life insurance policy held in an”Irrevocable Life Insurance Trust” can then be used to provide leverage on yearly exclusions or taxed gifts. This can mean considerable riches that transfer to younger generations. As an example, relatively small yearly exclusion presents may be used to pay the costs expense on a life insurance plan. Using the plan in such a way could lead to a significant survivor benefit to the donors’ children or grandchildren.
Life Insurance Trusts Can Provide Liquid Assets Exactly When Needed
“Life Insurance Trusts” are defined as follows: A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. (Wikipedia)
Life insurance held in “Irrevocable Life Insurance Trusts” can also play a vital role in having liquid assets available at the right time to settle taxes where there are no otherwise liquid or saleable assets. Any kind of inheritance tax owed normally has to be paid within nine months from the decedent’s date of fatality. If assets have to be offered promptly in order to satisfy the estate tax obligation “Irrevocable Life Insurance Trusts” can provide a cash benefit to pay inheritance tax obligations. Other assets could be overlooked or the estate simply may not understand the full potential value of other assets. In such a circumstance, insurance earnings could provide the conveniently available assets with which to pay an inheritance tax obligation.
First of All, You Have to Be Required to Pay Estate Tax
or None Of This Applies to You Anyway
First, this must be put in perspective before you get all excited. The average person in Utah won’t be obligated to pay estate taxes in the first place. To be responsible for federal estate taxes you must exceed the federal exemption which is currently $5 million (adjusted for inflation in 2012). If you do have to pay the tax rate is 35%. That $5 million includes your entire estate so you must really have a handle on the value of your assets. If you own a home worth $350,000 and you have saving of $250,000, you household may be worth another $100,000 and your 401K is valued at $500,000 (which I know many people would go wow- I wish) your are in the clear. (Remember: To determine your current net estate, add your assets then subtract your debts.) However, if your home alone is valued at $6 million you better start thinking about this trust, unless your debts are about the same.
So Why Does an “Irrevocable Life Insurance Trust” Help With Tax Obligations?
When your create you Life Insurance Trust, all of the proceeds from your life insurance policies within the Trust stay with the trust and are not payable to your spouse (survivor). Basically, the insurance trust owns your insurance policies not you. Since you don’t personally own the insurance it will not be included in your estate, which means your estate value is not increased by the value of the insurance asset. In other words, your estate taxes are reduced. (There is a three-year rule for existing policies though, see below).
Example: You are married and you and your spouse have a combined net estate of over $5 million when you die. If you have purchased a $1 million life insurance policy and placed it in an Irrevocable Life Insurance Trust the $1 million in insurance benefits would not be in your estate. That would save your family from paying hundreds of thousands potentially in estate taxes on that $1 million dollars. Much depends of course on how much life insurance you are eligible for, but you can see that every little bit helps.