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Home » Guardianship » What Is an Irrevocable Life Insurance Trust?

What Is an Irrevocable Life Insurance Trust?

September 23, 2014 by Larry Parman, Attorney at Law

If you have reached your financial goals, your work is not done. You may have accumulated wealth, but you have to protect that wealth for the benefit of succeeding generations. The federal estate tax looms large as a source of asset erosion. It can significantly reduce the legacy that you are leaving behind.

Life Insurance Policies

When you are inventorying your assets to evaluate your level of estate tax exposure, you must include everything that is considered to be countable by the Internal Revenue Service. This is going to include life insurance policies that you personally own.

If you have valuable life insurance policies, they can significantly increase your estate tax exposure.

Irrevocable Life Insurance Trusts

It is possible to remove the value of your life insurance policies from your taxable estate. You could convey these policies into an irrevocable life insurance trust or “ILIT”. If you take this action, the policies would no longer be in your personal possession, and as a result, they would no longer be part of your estate for tax purposes.

There is a three-year rule to consider if you are going to transfer an existing policy into an irrevocable life insurance trust. If you die within three years of such transfer, the policies would once again become part of your estate, so you must act in advance.

Another option to avoid the three-year rule would be to create the trust and have the trust purchase the life insurance policies in the first place. To implement this strategy you could use the annual $14,000 gift tax exclusion to fund the trust, so there would be no gift tax exposure. These funds could be used by the trustee to purchase life insurance policies.

Selection of Beneficiary

When you buy a life insurance policy directly, you would probably make your spouse the beneficiary if you are married. This can lead to the belief that you should make your spouse the beneficiary of your irrevocable life insurance trust.

This may not be the best idea, because your spouse’s estate could be facing estate tax exposure under these circumstances. If you made the trust itself the beneficiary, the tax savings could be extended. You could instruct the trustee to distribute resources to your spouse throughout the rest of his or her life, but your spouse would never actually own the assets.

It would be possible to make your children the successor beneficiaries, and they could enjoy asset protection and potential tax savings while they benefit from the assets that remain in the trust.

Blaine Peterson
Attorney
Parman & Easterday

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Larry Parman, Attorney at Law
Larry Parman, Attorney at Law
Founder and Owner at Parman & Easterday
After helping his own family deal with a lengthy probate and the IRS following his father’s untimely death in a farm accident, Larry Parman made a decision to help families create effective estate plans designed to reduce taxes, minimize legal interference with the transfer of assets to one’s heirs, and protect his clients’ assets from predators and creditors.
Larry Parman, Attorney at Law
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Filed Under: Guardianship, Living Trust Tagged With: Charitable Remainder Unitrust

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