How Irrevocable Life Insurance Trusts Provide Tax and Liability Protection

Written by Amine

Many people do not realize that the proceeds of a South Florida life insurance policy are added to your estate for estate tax purposes if the policy was owned by the deceased during the last 3 years of their life. This is the case for more than 90 percent of all life insurance policies. While the beneficiary is not taxed on the proceeds directly, the estate will be taxed at a rate of 55 percent starting in 2011. Often, the life insurance beneficiary is also the representative of the estate. This means that the government can tax your family to come and go if your plan is not structured properly.

Because of the huge tax implications, an Irrevocable Life Insurance Trust (“ILIT”) is quite useful for South Florida estate planning purposes. ILIT a legal instrument drafted by a South Florida estate planning attorney for the purpose of removing life insurance from your estate in order to reduce taxes and increase asset protection. You can name your spouse, child or other suitable party as the beneficiary of the trust.

You can also provide detailed directions to the ILIT trustee, including how the life insurance payout should be distributed, when the trustee should make payments, loans, or investments, what to do with the family business , who receives the assets upon death. or disability of your original beneficiaries, and when you terminate the trust. The ILIT gives you control of your money from beyond the grave and protects your children from unnecessary liability.

As you can see, structuring your life insurance policy so that the ILIT retains the life insurance benefit is useful for achieving a number of goals, including:

1. the limitation or elimination of the estate tax;

2. increase the level of assets available to your spouse, children, and loved ones or other entities after you are gone; and

3. provision of excess liquidity for a cash-strapped property or business.

Since the ILIT is a separate South Florida legal entity located outside of your estate, the IRS cannot levy property tax on the assets within the ILIT as they are out of your control. Due to the fact that you can put all your goals and wishes in the trust document, and because usually the only asset within the trust during your lifetime is your life insurance, it is a logical trade off to give up control in exchange for all the tax benefits. The trustee will be the applicant, owner, and beneficiary of your life insurance, so the proceeds never pass through your taxable estate and the estate tax is reduced by 55 in percent of the total life insurance benefit.

Having your own spouse or child act as the beneficiary of a South Florida life insurance policy on your life is another way to avoid estate tax on your life; however, the ILIT has the added benefit of also keeping undistributed proceeds out of your beneficiaries’ taxable estates. Properly planned ILITs will limit or eliminate estate taxes and generation-skipping taxes for multiple generations.

An ILIT can also help you increase the assets available to your beneficiaries because it makes it easy to own one or more life insurance policies. The South Florida trustee has the trust document as an efficient roadmap to follow regarding purchases, premium payments and distribution of proceeds. The ILIT injects cash into your estate by making distributions, purchases, or loans as needed. The ILIT trustee makes appropriate distributions of cash income to cover debts, taxes, and funeral expenses. The trustee can even buy some or all of the business with the cash income and run the business professionally until the children are old enough to take over. The trustee can also make suitable loans to the spouse, children and the business.

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