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What Is an Irrevocable Life Insurance Trust?

October 7, 2014Estate Planning

What Is an Irrevocable Life Insurance Trust?You should inventory your assets when you are planning your estate to determine whether or not you have any estate tax exposure. When you are doing so, you must include everything. This includes life insurance policies that you hold in your own name.

If you have life insurance policies and you are exposed to the federal estate tax, you could potentially mitigate that exposure through the creation of an irrevocable life insurance trust (ILIT). Before we look at the value of these trusts, we should provide some information about the federal estate tax.

Death Tax

The federal estate tax carries a $5.34 million exclusion. You can transfer as much as $5.34 million tax-free. Anything that is transferred that exceeds this amount is potentially subject to the estate tax. The top rate of the estate tax is 40 percent.

Irrevocable Life Insurance Trusts

To reduce your estate tax exposure, you could choose to convey your life insurance policies into an irrevocable life insurance trust. When you do this, you are removing the value of the policies from your taxable estate, assuming you live for at least three years after taking action.

Generally speaking, the policies would go back into your estate if you die within three years of conveying them into the trust. However, if you were to have the trust purchase insurance policies on your life, the three-year rule would not be applicable.

You may assume that you should make your spouse the beneficiary of the irrevocable life insurance trust. This is not necessarily the best idea, because your spouse would be in possession of a taxable estate after you pass away. The strategy would only be temporarily effective.

Another idea would be to make the trust itself the beneficiary of the policies. When you create the trust agreement, you name a trustee to administer the trust, and you leave behind instructions in the trust agreement. The trustee would be compelled to follow these instructions.

The agreement could allow for the trust to provide income to your spouse throughout the rest of his or her life, but he or she would never directly own the assets for estate tax purposes. You could allow for your children to assume ownership of the assets after the death of your surviving spouse, or they could simply benefit from the assets if they remain in the trust.

Download Our Special Report on Irrevocable Life Insurance Trusts

In this post we have scratched the surface. There are other things that you should understand about irrevocable life insurance trusts.

To obtain more detailed information, download our special report. This report takes an in-depth look at irrevocable life insurance trusts, and it is being offered free of charge at the present time.

Click this link to get your copy of the report: Free ILIT Report.

 

 

 

 

 

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Raymond German, Estate Planning Attorney

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