Estate Planing: An Irrevocable Life Insurance Trust

Upon your death, all all of your assets, (those in your name) will be listed on your Federal Estate Tax Return.  If the value of your estate is higher than that year’s estate tax threshold, estate tax will be owed. In 2011, the estate tax threshold will be one million dollars and the estate tax will be fifty five percent, which means that for every dollar you pass over the first million, your estate will be taxed 55 cents.

A million dollars may sound like a lot of money but it is really quite small when you consider that it includes life insurance proceeds, the value of your home, stocks, bank accounts, retirement accounts, jewelry, paintings, and anything else that you may have had titled in your name at the time you died. Estate taxes must be paid in cash within nine (9) months of death.

One approach to providing ready cash to pay these taxes and other expenses is through life insurance proceeds. The proceeds may be paid to the Federal government, which may eliminate the need for your heirs to liquidate assets in order to pay the estate tax bill.

While life insurance provides an income tax free death benefit be advised that the value of the benefit is added to the total of assets in the estate if not structured properly. This can generate a never-ending cycle of taxes and insurance policies.

The way to avoid this effect, while limiting or eliminating your estate tax, and present tax free money to your beneficiaries is to hold the life insurance policies in an Irrevocable Life Insurance Trust, or ILIT.

An ILIT combines both the protection a trust with the liquidity life insurance .

Taking advantage of the $13,000 per year gift tax exclusion, you can gift assets to your ILIT annually which will cover the insurance premiums while generating no tax consequence. At your death, the proceeds are transferred to your heirs free of all income tax and all estate tax. This technique will provide the necessary liquidity your heirs will need to pay your funeral costs, estate taxes, probate fees and settlement costs without forcing them to scramble.

Upon your death, the trustee of the ILIT will make appropriate distributions of cash proceeds to cover debts, taxes, and funeral expenses.

The trustee can even purchase some or all of your business with the cash proceeds and professionally run the business in your stead until your children are old enough to take over. The trustee is also able to make loans to your spouse, children, and business.

An ILIT provides flexibility and tax advantages. For more information on ILITs and to determine if they are the right vehicle for you, please contact your South Florida estate planning attorney.

For more information about estate planning techniques, and a free consultation, please contact the Florida estate planning  attorneys of  Wild Felice & Partners at 954-944-2855 or via email at info@wfplaw.com . Let us protect what you value most.