Another Way to Protect Your Estate from Excessive Taxation

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Upon your death, your heirs could owe estate taxes if your estate is valued at more than $5.45 million. That might sound like a problem that couldn’t happen to you, but remember that your estate will include things like the value of your home and the death benefit value of any life insurance policies that you own or control. Many people are “worth” far more than they think! Luckily, there are ways to remove some assets from your estate, meaning you can still pass them to heirs while keeping the value of your estate below the taxable minimum of $5.45 million.

An irrevocable life insurance trust, or “ILIT” is one such method of reducing estate taxes, and is often used when the value of a life insurance policy death benefit will push the value of the estate over the $5.45 million threshold. Under an ILIT, the insurance policy in question is actually owned by, and titled in the name of, the trust. The ILIT’s named beneficiaries are your heirs, and the value of the life insurance policy is excluded from your estate.

It’s a complicated legal maneuver, though, and there are three basic requirements to successfully implement an irrevocable life insurance trust.

It must be irrevocable. Once you’ve signed the documents, you cannot amend the trust. It’s a lifelong commitment, and you can neither borrow against nor remove funds from the trust.

Someone else must serve as trustee. You cannot be the trustee, but you can name another individual, professional fiduciary or even a corporate trustee.

The trust must exist for at least three years before your death. If you pass away before the trust has been in effect for three years, its value will still be include in your estate. This can present a tricky situation, since none of us know for sure how long we will live. There is one way around this problem, though: Have the trust purchase the life insurance policy from the start, rather than transferring an existing policy to the trust.

An ILIT can be a good estate planning option for some people, but there are also drawbacks to this maneuver. Call to set an appointment with our estate planning attorney, and we will discuss your situation and the best ways to protect your estate from excessive taxation.

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