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 is owned by the deceased during their last 3 years of life. This is the case for more than 90 percent of all life insurance policies. Although the beneficiary does not pay income tax directly, the estate will be taxed at the 55 percent level beginning in 2011. Most of the time, the life insurance beneficiary is also the representative of the estate. This means that the government can tax your family coming and going if your plan is not structured correctly.
Due to the huge 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 for the purpose of removing life insurance from your estate to reduce taxes and increase asset protection. You may designate your spouse, child, or 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 at death. or disability of their original beneficiaries, and when to terminate the trust. The ILIT gives you control of money from beyond the grave and protects your children from unnecessary responsibilities.
As you can see, structuring your life insurance policy so that the ILIT maintains the life insurance benefit is helpful in achieving a number of goals, including:
1. limit or eliminate the estate tax;
2. increase the level of assets available to your spouse, children, and other loved ones or entities after you are gone; and
3. Provide additional liquidity to a cash-strapped estate or business.
Since the ILIT is a separate legal entity in South Florida that is outside of your estate, the IRS cannot impose a wealth tax over the assets within the ILIT as they are out of its control. Due to the fact that you can lay out all of your goals and desires in the trust document, and since normally the only asset held in the trust during your lifetime is your life insurance, it makes sense to relinquish control in exchange for all 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 percent of the total life insurance benefit. 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 inheritance tax on your life; however, the ILIT has the added benefit of keeping undistributed income out of the taxable estate of your beneficiaries. Properly planned ILITs will limit or eliminate estate taxes and generation-skip taxes for multiple generations.
An ILIT can also help you increase the assets available to your beneficiaries by making it easier to own one or more life insurance policies. The South Florida trustee has the trust document as an efficient road map to follow regarding the purchase, premium payments, and distribution of income. The ILIT infuses your estate with cash by making distributions, purchases or loans as needed. The ILIT trustee makes appropriate distributions from cash income to cover debts, taxes and funeral expenses. The trustee could even buy out part or all of the business with the cash proceeds and run it professionally until the children were old enough to take it over. The trustee may also make appropriate loans for the spouse, children, and business.
