a Life Insurance Trust
Life insurance proceeds
are generally part of your estate and may be subject to estate taxes depending
on the size of your taxable estate. This influx of cash to the estate,
while usually quite large and often needed for funeral expenses, taxes
and debts, is a cause for much confusion. In some cases, the life insurance
proceeds are what increases the estate to the size where it starts to
Just how the life
insurance is owned and paid for can nearly double its monetary value if
estate taxes do not have to be paid on it. Estate tax rates have come
down, but can be as high as 40% for large estates.
How do you avoid these
estate taxes? Set up an Irrevocable Life Insurance Trust, commonly called
an ILIT. Note that an ILIT is irrevocable, you cannot change your mind
after it is established. Many tax and financial advantages come from this
restriction and the nature of life insurance.
Here is how it works
your specific need.
Often an ILIT is used as the most effective way possible to pay estate
taxes. Usually premiums represent pennies on the dollar of benefits
paid on your death. Using the insurance proceeds to cover estate taxes
may be a better choice than having to liquidate other assets.
Set up the trust.
You need professional assistance in setting up an ILIT. Even if your
insurance company offers to draft the documents, be sure your attorney
reviews them. Your attorney will be more familiar with your situation
and more aware of local laws affecting your estate. You will have to
select a trustee for the ILIT. Usually personal trusteeship of the trust
is the most cost efficient, but your trustee needs competent advice
for the simple reporting requirements.
Fund the trust.
The trust owns the life insurance policy and pays the premiums. You
may be able to make annual gifts to the trust to cover the premiums.
However, there are special rules about this and you should cover this
issue with your attorney.
the insurance policy.
The trust purchases life insurance on your life with its assets. Along
with being the owner, the trust is the beneficiary of the policy and
your heirs are the beneficiaries of the trust. When you are considering
what type of life insurance to buy, along with term and cash value whole
life, consider a "second-to-die" policy. This is a relatively new form
of life insurance policy and can be very attractive as part of a total
family estate plan.
No one likes to think about dying. Buying life insurance is usually not
something most people eagerly do. However, life insurance can provide
the funds needed to care for your loved ones after you pass on. Life insurance
trusts have become a common way to make sure you have structured your
affairs to minimize estate taxes and maximize what is available for your