Life Insurance Trusts and Estate Planning
For those of you who want to provide for a spouse or other beneficiaries, Life Insurance held in an irrevocable trust ("ILIT") is the way to go. An ILIT can shelter the insurance proceeds from estate taxes, provide a "creditor free" asset and cash flow base for your spouse and other beneficiaries . In addition, you can specify the terms and conditions of how a beneficiary can enjoy the use of the ILIT's assets. Plain and simple, as a general rule, the insurance policy and their proceeds held in an ILIT are not a part of your taxable estate, if the policy is originally owned by the ILIT. The exception to this rule applies if you transfer a pre-existing rather than a newly purchased policy into an ILIT. If this is the case, you must survive for 3 years after the transfer or the policy proceeds are taxed in your estate.
The full benefit of an ILIT is enjoyed by those individuals who have a taxable estate. For 2008, you have a taxable estate if your assets exceed $2 million dollars. This amount rises to $3.5 million dollars in 2009. If you are married and your assets are properly divided, these amounts are doubled. While you are alive, the sole asset of the Trust is the insurance policy. The policy premiums are paid by gifting the premium amount to the ILIT's Trustee. You can not be the Trustee of your own ILIT. However, a spouse, financial institution or just about anyone you designate can be a Trustee.
The Trustee's duty while you are alive, is to pay the premium once received from you, file tax returns if required, and make sure that the selected policy and insurance company are sound and will have the ability to satisfy its intended purpose. After your death, your selected trustee, must carry out your wishes as set forth in the Trust document. Since the Trust is irrevocable, no one can change your instructions and the trustee is bound to follow them. So, make sure the Trust reflects your wishes before you sign it. Please keep in mind that the TRUST not you owns the policy. You will not receive a benefit from it during your lifetime, the policy proceeds are for your beneficiaries.
After your death, the assets of the Trust(insurance proceeds) are available for investment. Such investments can include the purchase of assets from your estate. This will assist the estate to meet it's tax obligations, prevent a forced sale of family assets to third parties and preserve the asset mix for your family. It will also reflect your wishes in the management and control of the assets and how they are disbursed to family members.
In summary, the ILIT is a great estate planning tool when you want to increase the assets and income available to a surviving spouse, take care of your children, grandchildren, or a charity, because the policy proceeds which are immediately available to the beneficiaries in a properly drafted and managed ILIT are not a part of your taxable estate.
If you would like to discuss this estate planning tool in further detail, please feel free to contact this office.