We like to unravel the alphabet soup of estate planning acronyms on our blog from time to time. Today we will look at the legal device called the ILIT. In an estate planning context, an ILIT is an irrevocable life insurance trust.
Federal Estate Tax
Before we explain the value of an ILIT, you must understand some things about the federal estate tax.
There is a federal estate tax credit or exclusion. If the value of your estate exceeds the amount of this credit, the estate tax is potentially applicable. In 2014, the estate tax exclusion is $5.34 million. It can be adjusted annually to account for inflation, so it may be somewhat higher next year.
When you are calculating the value of your estate, life insurance policies that you directly own are part of the equation. For example, if you have a $3 million life insurance policy, this would be part of your taxable estate. This would consume most of your exclusion.
Irrevocable Life Insurance Trusts
An ILIT can help if you are exposed to the federal estate tax. You could convey your life insurance policies into an irrevocable life insurance trust. When you create the trust, you name a trustee.
You cannot act as the trustee, but the trustee could be your spouse, your children, or anyone that you know and trust. It would also be possible to use a professional fiduciary entity like a trust company.
The trust will own the policies; you no longer own them. As a result, the estate tax will not be imposed when the trust assumes ownership of the insurance policy proceeds.
When you create the trust agreement, you must also name a beneficiary or beneficiaries. It is advisable to make the trust the beneficiary in most cases. In this manner, the trustee will follow your instructions with regard to the actions of the trust, but no individual will take personal possession of the assets after you die. This extends the tax protection.
You could instruct the trust to provide your spouse with income for the rest of his or her life, and then do the same for your children.
It should be noted that there is a “three-year rule.” You must convey the insurance policies into the ILIT at least three years prior to your passing. If you die within three years of placing the policies into the trust, the insurance proceeds would be looked upon as part of your taxable estate by the Internal Revenue Service.
To avoid this fate, you could potentially create the trust and have the trust purchase your insurance policies.
Irrevocable Life Insurance Trust in San Jose: Free Report
If you would like to learn more about irrevocable life insurance trust in San Jose, California, download our free report. You can access the report through this page: Free ILIT Report.
