Life Insurance is included in the value of a decedent’s estate for tax purposes. Currently, the estate tax exemption is approximately $5.45 million and is indexed for inflation. As a result, only a very small percentage of estates are taxable; however, many persons own large life insurance policies and tax laws are subject to change and may decrease in the future. Irrevocable Life Insurance Trust (ILITs) can be used to remove the value of life insurance from an estate and may reduce or eliminate estate taxes.
ILIT is the acronym for an Irrevocable Life Insurance Trust. An Irrevocable Life Insurance Trust is an irrevocable trust (a trust in which the grantor completely gives up all rights in the property transferred to the trust including any rights to revoke, terminate, or modify the trust in any material way) that holds a life insurance policy.
ILITs can provide privacy, reductions in estate taxes, and creditor avoidance. Privacy and creditor avoidance may be reached by removing the assets from the probate estate. A reduction in estate taxes may be reached by removing the assets from the taxable estate. To do this, the grantor must now own or control the policy.
There are a number of considerations for an ILIT: 1) whether to include Crummey Powers, 2) whether to include Powers of Appointment for the beneficiaries, 3) how to pass property to the beneficiaries – outright or in trust, and 4) tax considerations.
Once the ILIT is in place, there are a number of steps that should be taken to ensure that the proceeds will not be part of a taxable estate. We work with families and individuals to determine if there is a likelihood of an estate tax and if so, to develop a plan that minimizes the tax due upon death. This article only provides a brief, general introduction, for more detailed information and to discuss your specific case, call us today at (678)781-9230 or email us at sgrissom@grissomlawfirm.com to schedule an appointment.
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