Irrevocable Life Insurance Trusts
Life insurance is an important component of many estate plans. Life insurance can be used to create an estate, such as for a young couple with children who have not accumulated much wealth and are concerned about providing sufficient funds to raise their children, or for liquidity, to pay debts and taxes without having to liquidate business interests or investments. It can also be part of a comprehensive estate planning strategy designed to leverage the applicable exclusion for estate and gift taxes, replace wealth being transferred to a charity, or be an important component of a business succession plan.
Potential Problems of Life Insurance
The distribution of life insurance policies is controlled by beneficiary designations. Probate may be required if the decedent’s estate is named as a beneficiary, if the named beneficiaries are all deceased, or if the beneficiary is a testamentary trust created under a will.
It is a common misconception that life insurance proceeds are “tax-free”-while the increase in cash value within the policy is not subject to income taxation, the amount of the death benefit can be included in the insured’s taxable estate if the insured held any “incident of ownership” in the policy within three years of the date of the insured’s death. Some insureds attempt to avoid the imposition of estate tax on their policy by naming their spouse as the owner of the policy, but this merely defers the estate tax owed on the policy until the death of the spouse. Others name their children as owners, but this exposes the life insurance to claims by the childrens’ creditors, and if a child divorces, to a potential claim in the divorce.
The Solution-The Irrevocable Life Insurance Trust
An Irrevocable Life insurance Trust (ILIT) allows you to avoid these potential pitfalls. An ILIT is a trust which is both the owner and the beneficiary of your life insurance, thereby removing the insurance proceeds from your estate and the estate of your spouse. Your spouse can be the beneficiary of the trust, as long as certain formalities are followed. Irrevocable Life Insurance Trusts require careful adherence to certain requirements; your estate planning attorney can explain to you in detail how you may benefit from creating an ILIT.
Contact Us for Estate Planning Assistance
We welcome the opportunity to serve your estate planning, probate, and trust administration needs. Contact The Hawkins Law Firm to schedule a consultation with an experienced trust and estate attorney.