Long Island Elder Law & Estate Planning

In this post we are going to look at the value of irrevocable life insurance trusts. However, before we examine these trusts, we must provide some background information.

Federal Estate Tax Exposure

An irrevocable life insurance trust can be useful if you are exposed to the federal estate tax. When you are planning your estate, you should evaluate all of your taxable resources so that you know if you do in fact have any estate tax liability.

During the current calendar year, the amount of the federal estate tax exclusion or credit is $5.34 million. You can pass along this much tax-free, but anything that exceeds this amount would potentially be taxable at a maximum rate of 40 percent.

Insurance Policies

When you are inventorying your resources, you should understand the fact that life insurance policies that you personally own would be looked upon as part of your taxable estate. If you have life insurance policies, you may want to remove these policies from your estate if it is at all possible.

Irrevocable Life Insurance Trusts

You could potentially remove your life insurance policies from your taxable estate by conveying them into an irrevocable life insurance trust (ILIT). When you create the trust you name a trustee who serves as the trust administrator. This can be an individual who is known to you, or it could be a professional fiduciary entity such as a trust company.

With any trust you are going to name a beneficiary. You may think that you should make your spouse the beneficiary of your irrevocable life insurance trust, but there is another option.

If your spouse was to directly inherit the assets in the trust as the beneficiary, he or she would be faced with estate tax exposure. You could go another route and make the trust itself the beneficiary.

After you die, the trustee would follow the instructions that you recorded in the trust agreement. You could allow for distributions to your surviving spouse. He or she could benefit from the trust, but your surviving spouse would never directly own the assets, and this would extend the estate tax efficiency.

You must be aware of the three-year rule when you are implementing this strategy. If you pass away within three years of funding the trust with the policies, the insurance policies would once again become part of your taxable estate.

There is another benefit that can be derived from the creation of an irrevocable life insurance trust. You could have the trust purchase insurance policies on your life. The proceeds from the policies could be utilized to pay the estate tax after you pass away.

Free ILIT Report

This has been a brief look at irrevocable life insurance trusts. To learn more, download our free report that takes an in-depth look at ILITs. To obtain access, click the following link: Free ILIT Report.

 

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About Mark S. Eghrari, Estate Planning Attorney

Mark S. Eghrari is an attorney in private practice in Smithtown, New York. He has been in practice since 1988. Mark S. Eghrari provides extensive estate and tax planning services to individuals and businesses. Mr. Eghrari’s primary focus is helping clients avoid probate, minimize or eliminate Federal and State Estate taxes and protect their assets from the high cost of nursing care, if they become ill.