HOW LIFE INSURANCE CAN HELP PROTECT YOUR ESTATE FROM TAXES

After working hard for years to build your wealth, it's probably important to you that your assets be carefully preserved for your family. While a will and a trust are two important components of an estate plan, they can still leave your heirs with a considerable tax bill. One vehicle that can significantly ease the tax burden for your heirs is an irrevocable life insurance trust or ILIT. An ILIT is a vehicle for holding an insurance policy so that it will not be included in your taxable estate.

An ILIT is structured so the trustee of the trust itself owns the life insurance policy. The donor pays premiums into the policy by taking advantage of annual gift exclusions, which allow an individual to gift up to $11,000 without tax consequences (for married couples the amount is $22,000). The maximum amount an individual could contribute to an ILIT depends on the number of beneficiaries named in the trust. For example, if five children are named as beneficiaries of the trust, an individual could contribute up to $55,000 annually to the trust ($110,000 if married) to pay the premiums on the life insurance policy held by the trust. Upon the death of the donor or the donor and spouse, the life insurance policy's proceeds are paid to the trust. The trustee then distributes that money to the beneficiaries as outlined by the terms of the trust.

By definition an ILIT is "irrevocable" to the donor, meaning the donor cannot change the trust or cash out the policy and personally receive the funds. Instead a trustee holds the life insurance policy, and he or she can liquidate the policy per the terms of the trust, and distribute proceeds to the beneficiaries of the trust. Beneficiaries will typically collect their inheritance from the trust at one of three times:

1. upon the death of the donor,
2. the donor and spouse, or
3. at some other time established by the terms of the trust.

Typically, an individual could hold a life insurance policy on himself or herself. However, upon the individual's death, proceeds from the policy would be included in that individual's estate and could therefore be subject to estate taxes, which can account for up to 50 percent of the value of an estate's assets. However, in an ILIT the life insurance policy is held by the trustee, therefore it is not included in the donor's estate and is not subject to the estate tax.

Should you choose to set up an ILIT, it is key to select a trustee that you believe will carry out your wishes for your estate. A trustee's obligations include making investment decisions that parallel the goals of the trust, maintaining accurate financial records and complying with IRS regulations. Some people choose a close friend or relative while others find it beneficial to name a corporate trustee because of the numerous duties a trustee must perform. Talk with your tax and legal advisors about the best way to help your family avoid a big tax bill along with their inheritance.

A.G. Edwards does not render legal, accounting or tax preparation advice. You should consult your tax and legal advisors for questions regarding your specific situation.

Copyright
This article was provided by Steven J. Hall, (815) 744-2664 of A.G. Edwards & Sons, Inc., Member SIPC.