Tax and Money Tip of the Week
Is an Irrecovable Life Insurance Trust
Right for You? | October 3rd, 2012 | No. 112

Most of us have some sort of life insurance, so that when we die, our loved ones will be able to use the proceeds to pay off our debts and provide for some of their future living expenses. One thing that is often overlooked is that life insurance proceeds can be subject to Federal estate taxes when we die. For 2012, the Federal estate tax rate is as high as 35%. For 2013, if there are no changes, that rate can be 55%.

You only pay estate tax on property that you own at your death. One way to avoid paying estate tax on life insurance proceeds is to have the policy owned by an Irrevocable Life Insurance Trust, or ILIT (say, “eye-lit”).

What is an ILIT & how does it work?  

An ILIT is a type of trust that can be set up to hold life insurance policies. Instead of you owning a policy on your life, the ILIT owns it. Then, you name the ILIT as the beneficiary of your policy. Your family would be the beneficiaries of the ILIT and would receive the proceeds of your policy via the ILIT. During your lifetime, the policy premiums would be paid by the ILIT, after you had transferred the cash to a bank account owned by the ILIT.

An ILIT is irrevocable, which means that once it is set up, you cannot change it. But that also means that any life insurance policies owned by the ILIT are not owned by you; therefore, you will not owe any estate tax on the proceeds.

A properly drafted ILIT will allow your life insurance proceeds to flow to the beneficiaries you want, without being decreased by estate tax. Make sure that you have it set up by an experienced attorney.

Maintaining an ILIT can be involved, as there are gift tax consequences as well as accounting and tax returns that will need to be addressed. You would name a Trustee (consider a professional), who would administer the trust and deal with these issues.

While there will be costs involved with setting up and maintaining an ILIT, the potential estate tax savings should more that outweigh these administrative costs.

If you think that an ILIT could be an option for you in your estate plan, give me a call to discuss in more detail.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.