Are you a high net worth individual or couple that has been told that your life insurance benefits are “tax free”? The answer depends on the amount of your assets. If you have above average net worth, you can keep the tax man away from the death benefit proceeds of your life insurance policies with an Irrevocable Life Insurance Trust.
The use of an ILIT offers two benefits: First, life insurance owned by an ILIT will remove the value of the insurance proceeds from the insured's taxable estate; and second, the insurance proceeds can provide immediate cash to pay funeral costs, expenses and taxes.
What Does An Irrevocable Life Insurance Trust Do?
An Irrevocable Life Insurance Trust serves the following function for estate planning and asset protection:
- Removes life insurance proceeds from your taxable estate
- Provides tax-free liquidity to your estate
- Preserves real estate; family business or other liquid assets
- Maximizes inheritance while minimizing taxes paid to the federal and state governments
The ILIT is a very practical tax-oriented planning tool established specifically to take ownership of an insurance policy on the life of the insured. The ILIT removes the insurance death benefit proceeds from the calculation of the taxable estate upon the death of the insured.
Cash held inside of the ILIT and within the policy owned by the ILIT is generally beyond the reach of potential lawsuit creditors because the trust itself is irrevocable and all the assets that it owns are not within the legal ownership of the insured or the grantor. Such assets belong exclusively to the ILIT, which is considered a separate 'person' under the law and which is administered by a carefully selected trustee who operates under a strict standard of care, owing a fiduciary duty to the beneficiaries of the ILIT.
Under existing tax law and regulations, a policy owned by an ILIT pays out its death benefit at the demise of the insured payable to the ILIT 100% free of income tax AND federal estate taxes. This is the primary reason people use ILITs – to pay a large death benefit and ensure that it is not subject to either income taxes or federal estate taxes.
Policies that are issued after the formation of the ILIT automatically escape inclusion in the taxable estate. Policies that pre-date the formation of the ILIT are subject to a "three-year rule" that include the insurance death benefit in the taxable estate if death occurs within the first three years after the trust's formation. The "three-year rule" can often be circumvented simply by working with an insurance carrier to re-issue the policy. This is referred to as a 1035 exchange, and is commonly done so the new policy post-dates the date of the ILIT. Consult with a professional at NCH for details.
Want to find out more about an Irrevocable Life Insurance Trust? Call a Nevada Corporate Headquarters representative today at 1-800-508-1729.
*Legal Disclaimer – Nevada Corporate Headquarters, Inc. has prepared the content of this website for informational purposes only. It is not legal advice. Our legal services are provided by an in-house independent Nevada law firm.*
