To most estate planners, basic estate planning would include a will, living trust (where applicable), credit shelter trust (if married), property power of attorney, medical power of attorney and living will. Reducing the federal estate tax beyond the credit shelter trust usually requires an irrevocable transfer of the ownership and use of assets to your loved ones .This strategy is generally appropriate only for the wealthy. The Irrevocable Life Insurance Trust (“ILIT”) though, has the potential to escape estate tax while retaining the ability to control the disposition of assets in the form of life insurance proceeds
Proceeds of life insurance policies owned or deemed owned by a deceased insured or payable to his or her estate can be subject to the federal estate tax depending on the size of the estate. You can avoid having the life insurance proceeds included in your taxable estate by naming someone else such as your spouse or children as the owner of the policy. For many people, this is not a practical solution. For example, this may not be in the best interests of your children if they are minors or otherwise not in a position to manage a large sum of money. Furthermore, the proceeds would be included in the beneficiary’s estate.
The ILIT may be an opportunity to have your cake and eat it too, in that you can provide who and under what circumstances receives the proceeds while escaping the federal estate tax on these proceeds. The trust and not the insured, spouse or heirs must own the policy, The insured must not have any of the powers of ownership such as the right to change the policy in any way. For new policies, the trustee is the original applicant and subsequent sole owner of the policy. The ownership of an existing policy can be transferred to the trust by completing an irrevocable assignment form provided by the insurance company designating the trust as the new owner and beneficiary of the policy. However, if the transferor insured dies within three years of the transfer of an existing policy (but not the purchase of a new policy), the proceeds will be taxable for estate tax purposes.
Like wills and other estate planning documents, sample ILITs can be obtained on the internet. It is highly recommended though to engage an attorney to draft an ILIT because certain legal issues may have to be addressed. For example, if an existing policy is transferred to an ILIT, the cash surrender value could be a taxable gift. A taxable gift can also occur to the extent the insured pays the premium for the insurance policy unless a “Crummey Power” is utilized.
In addition to these pitfalls, a well drafted trust can provide opportunities for the insured and his or her beneficiaries. For example, a “fail-safe” clause could provide protection from the estate tax should the insured die within three years of the transfer of an insurance policy to an ILIT. Also, it is customary to add a clause to the trust authorizing the trustee to either purchase assets from or lend money to the insured’s estate. This option provides the estate with liquidity while shielding the insurance proceeds from tax.
Any competent estate planning attorney can help you avoid the pitfalls and take advantage of the opportunities of an Irrevocable Life Insurance Trust.
Proceeds of life insurance policies owned or deemed owned by a deceased insured or payable to his or her estate can be subject to the federal estate tax depending on the size of the estate. You can avoid having the life insurance proceeds included in your taxable estate by naming someone else such as your spouse or children as the owner of the policy. For many people, this is not a practical solution. For example, this may not be in the best interests of your children if they are minors or otherwise not in a position to manage a large sum of money. Furthermore, the proceeds would be included in the beneficiary’s estate.
The ILIT may be an opportunity to have your cake and eat it too, in that you can provide who and under what circumstances receives the proceeds while escaping the federal estate tax on these proceeds. The trust and not the insured, spouse or heirs must own the policy, The insured must not have any of the powers of ownership such as the right to change the policy in any way. For new policies, the trustee is the original applicant and subsequent sole owner of the policy. The ownership of an existing policy can be transferred to the trust by completing an irrevocable assignment form provided by the insurance company designating the trust as the new owner and beneficiary of the policy. However, if the transferor insured dies within three years of the transfer of an existing policy (but not the purchase of a new policy), the proceeds will be taxable for estate tax purposes.
Like wills and other estate planning documents, sample ILITs can be obtained on the internet. It is highly recommended though to engage an attorney to draft an ILIT because certain legal issues may have to be addressed. For example, if an existing policy is transferred to an ILIT, the cash surrender value could be a taxable gift. A taxable gift can also occur to the extent the insured pays the premium for the insurance policy unless a “Crummey Power” is utilized.
In addition to these pitfalls, a well drafted trust can provide opportunities for the insured and his or her beneficiaries. For example, a “fail-safe” clause could provide protection from the estate tax should the insured die within three years of the transfer of an insurance policy to an ILIT. Also, it is customary to add a clause to the trust authorizing the trustee to either purchase assets from or lend money to the insured’s estate. This option provides the estate with liquidity while shielding the insurance proceeds from tax.
Any competent estate planning attorney can help you avoid the pitfalls and take advantage of the opportunities of an Irrevocable Life Insurance Trust.
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