Many people don’t realize that proceeds from a South Florida life insurance policy are added to your estate for estate tax purposes if the policy was owned by the deceased within its last 3 years. of life. This is the case for more than 90% of all life insurance policies. Although the beneficiary is not taxed directly on the proceeds, the estate will be taxed at 55% starting in 2011. In most cases, the life insurance beneficiary is also the representative of the estate. This means the government can tax your family’s comings and goings if your plan isn’t properly structured.
Due to the massive tax implications, an Irrevocable Life Insurance Trust (“ILIT”) is very useful for estate planning purposes in South Florida. An ILIT is a legal instrument written by a South Florida estate planning attorney to remove life insurance from your estate to reduce taxes and increase asset protection. You can designate your spouse, child or any other appropriate party as the beneficiary of the trust.
You can also provide detailed instructions to the ILIT trustee, including how the life insurance payment should be distributed, when the trustee should make payments, loans or investments, what to do with the family business , who receives the assets upon the death or disability of your original beneficiaries, and when to terminate the trust. ILIT gives you control over money from beyond the grave and protects your children from unnecessary liability.
As you can see, structuring your life insurance policy so that the ILIT owns the life insurance benefit is helpful in achieving a number of goals, including:
1. limit or abolish inheritance tax;
2. increase the level of assets available to your spouse, children and other loved ones or entities after your departure; and
3. Provide additional cash to a cash-strapped estate or business.
Because ILIT is a separate South Florida legal entity that is not part of your estate, the IRS is unable to levy a inheritance tax on the assets within the ILIT since they are beyond your control. Since you are able to lay out all of your goals and desires in the trust document, and because normally the only asset inside the trust during your lifetime is your life insurance, it makes sense to give up control in exchange for all the tax benefits. The trustee will be the applicant, owner and beneficiary of your life insurance, so the proceeds will never pass through your taxable estate and estate tax will be reduced by 55% of the total insurance benefits. life.
Having your spouse or child own and act as beneficiary of a South Florida life insurance policy on your life is another way to avoid estate tax on your life; however, ILIT has the added benefit of also keeping undistributed proceeds out of your beneficiaries’ taxable estates. Properly planned ILITs will limit or eliminate inheritance taxes and generation skip taxes for multiple generations.
An ILIT can also help you increase the assets available to your beneficiaries because it makes it easy to hold one or more life insurance policies. The South Florida trustee has the trust document as an effective road map to follow regarding purchase, payment of premiums, and distribution of proceeds. ILIT injects money into your estate by making distributions, purchases or loans as needed. The ILIT Trustee makes appropriate distributions of cash proceeds to cover debts, taxes, and funeral expenses. The trustee could even buy part or all of the business with the cash proceeds and professionally manage the business until the children are old enough to take over. The trustee could also make appropriate loans to the spouse, children and business.