Certain steps must be taken to reduce your estate tax liability if the value of your assets exceeds the exclusion amount. One course of action to this end could be the creation of an irrevocable life insurance trust or ILIT.
When you convey assets into an irrevocable trust rather than a revocable trust you no longer retain incidents of ownership. Therefore, these trusts are often utilized by people seeking asset protection and estate tax efficiency.
When you are tallying your resources to evaluate your estate tax exposure you should understand the fact that life insurance proceeds are potentially subject to the federal estate tax.
The estate tax exclusion is $5.25 million right now. So, if you had insurance policies on your life that pay out $3.25 million only $2 million of your exclusion would be left to apply to the rest of your estate.
That is, unless you placed the policies into an ILIT.
If you were to convey the policies into an irrevocable life insurance trust you would be removing them from your estate for tax purposes. However, the beneficiaries that you choose when you create the trust can still benefit from the funds after you pass away.
With an ILIT there is a three-year rule regarding conveyance of policies into the trust. If you die within three years of placing the policies into the trust estate tax would still be applicable.
Because of the above you may want to create an ILIT and have the trustee purchase the insurance policies initially. Since there is no transfer of ownership the a three-year rule would not apply.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.