To understand the value of an irrevocable life insurance trust, you must first absorb some background information about the federal estate tax.
The federal estate tax can be a factor if you pass away with an extremely valuable estate. In 2014, the estate tax credit or exclusion is $5.34 million. This is the amount that can be passed on free of the death tax. Anything that you are transferring that exceeds this amount is potentially subject to taxation.
When you are determining the overall value of your estate, you must include the value of insurance policies that you personally own. Removing your insurance policies from your taxable estate could be a good way to reduce or eliminate your estate tax exposure. This can potentially be done through the creation of an irrevocable life insurance trust.
Irrevocable Life Insurance Trusts (ILITs)
When you create an irrevocable trust you are surrendering incidents of ownership. As a result, generally speaking, assets that have been conveyed into any type of irrevocable trust would no longer be part of your taxable estate.
When you fund an irrevocable life insurance trust with your life insurance policies, you are removing the value of the policies from your estate for tax purposes.
When you create the trust, you name a trustee who will administer the trust after your passing, and you name a beneficiary or beneficiaries.
You may think that you should make your spouse the beneficiary. In fact, you can extend the tax advantages by making the trust itself the beneficiary. When you create the trust agreement, you can instruct the trustee to distribute assets to your spouse, but your spouse doesn’t actually own the assets that are contained in the irrevocable life insurance trust.
As a result, when your spouse dies, the estate tax would not be levied. Your children could benefit from the trust without paying the estate tax.
There are also asset protection benefits. Because the trust owns the assets, the resources would be protected from legal actions against anyone who is benefiting from the trust via the terms of the trust agreement.
You could also choose to have the trust purchase life insurance policies and arrange for the proceeds to be used to pay the estate tax.
It should be noted that there is a three-year rule when it comes to placing insurance policies into an irrevocable life insurance trust. If you were to pass away within three years of conveying policies into the trust, they would once again become part of your estate for tax purposes.
Free Report on Irrevocable Life Insurance Trust in Indianapolis
We have prepared a free report on irrevocable life insurance trusts. If you would like to learn more, download the report. You can access your copy through this link: Free ILIT Report.