The acronyms that are used in the field of estate planning can sometimes leave the layperson scratching his or her head. Because of this, we often examine commonly used acronyms to take the mystery out of them. In this installment, we will highlight the irrevocable life insurance trust or ILIT.
The estate tax on the federal level carries a 40% maximum rate, and the 2014 exclusion amount is $5.34 million. If you inventory your assets and find that your net worth exceeds this figure, you would do well to take steps to gain estate tax efficiency.
When you are doing your accounting, you should be aware of the fact that the value of insurance policy proceeds would count toward your taxable estate.
This is where the ILIT comes in.
If you were to transfer the policies to an ILIT, they would no longer be part of your estate. After you pass away the beneficiaries that you choose could receive distributions from the trust even though they don’t technically own the assets.
One thing to take into consideration when you are thinking about an ILIT is the fact that there are no benefits if you decide to place the policies into an ILIT once you find out that you have very little time to live. There is a three-year rule. If you die within three years of transferring policies into one of these trusts, the proceeds are still considered to be part of your estate for tax purposes.
To render this rule irrelevant you could create the trust and have the trustee purchase insurance policies on your life.
For more information on irrevocable life insurance trusts, click on the following link to request our free report: Getting the Most Out of Your Life Insurance: The Irrevocable Life Insurance Trust