In the field of estate planning the acronym ILIT stands for an irrevocable life insurance trust. This type of trust can be useful for those who are exposed to estate taxes.
There is a federal estate tax that is applicable in all 50 states, and some states have state-level estate taxes. We have offices in Kentucky and North Carolina. These states do not impose state-level estate taxes.
Federal Estate Tax Parameters
Before we examine the value of an ILIT, we should provide some background information about the federal estate tax. When you transfer assets to others, the estate tax is applicable unless you are transferring resources to your spouse. There is an unlimited marital estate tax deduction that allows you to leave any amount of money and/or property to your spouse tax-free.
In 2014 there is a $5.34 million federal estate tax credit or exclusion. You can transfer up to $5.34 million free of taxation. Anything that you transfer above this amount (to people other than your spouse) would potentially be subject to the estate tax. The amount of this exclusion is subject to change by Congress.
Irrevocable Life Insurance Trusts
When you are tallying up the value of your assets to determine your estate tax liability, you must include the value of insurance policies that you personally own. You could remove the value of the insurance policies from your taxable estate if you were to convey them into an ILIT.
When you create the trust you name a trustee who will act as the trust administrator. This can be a person, but many people will utilize a trust company or the trust section of a bank. You could also name the trust as the primary beneficiary to maximize your tax advantages.
You create a trust agreement when you are establishing the trust. Within this agreement you leave behind instructions that the trustee must follow. After your passing, the trust assumes ownership of the insurance policy proceeds. Because the trust is also the beneficiary, the people that will benefit from the assets contained within the trust do not personally own these resources.
In the trust agreement you could instruct the trustee to provide your surviving spouse with income throughout his or her life, but your surviving spouse would never directly own the property in the trust. As a result, there would be no estate tax liability after the death of your surviving spouse. You could instruct the trust to distribute its assets to your children after the death of your spouse.
There is a three-year rule with regard to ILITs. If you die within three years of conveying policies into the trust, they once again become part of your taxable estate.
There are some other advantages that can be realized through the creation of an ILIT. To learn more, contact us to schedule a free consultation.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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