Use a Life Insurance Trust to Achieve Some Estate Planning Goals
Use a Life Insurance Trust to Achieve Some Estate Planning Goals
Life insurance creates money in the form of a death benefit when you die. A couple or reasons to hold an insurance policy during retirement include helping to pay estate taxes and ensuring a specific legacy to your heirs. But estate taxes can take a big chunk of your estate - and that includes any proceeds of your life insurance. Using a life insurance trust can bypass estate taxes and help in other ways. Here's how.For 2011 and 2012, estate taxes will grab 35% of your estate in excess of $5 million - the exclusion amount. The same is true for your total gifts made during your life. So, if you'll have in excess of $5 million at your death - including any proceeds your life insurance will produce - you might want to consider setting up an irrevocable life insurance trust (ILIT). The main purpose of an ILIT is to take over ownership of any life insurance policy on your life. Doing so takes the insurance proceeds out of your estate - i.e. what you own - so it won't be subject to estate tax. That makes your insurance proceeds 100% useable for what you want it to do. Typical reasons for using an ILIT are to shelter money from estate taxes to* ensure a specific legacy to your heirs free of estate tax* pay estate taxes on your business so it can keep on operating* split off a legacy for your children of a first marriageBecause the ILIT is an irrevocable trust, you permanently lose control of whatever is in the trust. That's what keeps whatever is in it out of your estate. Of course you determine what happens in the trust document.-Funding your ILIT:You fund your ILIT with a life insurance policy on your life. You can do this one of two ways: 1. Transfer ownership of your policy on your life to the ILIT, or2. Let the ILIT purchase a new policy on your life so it owns the policy If you transfer your own policy to the ILIT you must do so 3 years before you die. Otherwise federal estate tax law require that its death benefit proceeds revert to your estate for taxation purposes. That's because you can't make deathbed - or near (~3 years) - gifts.Because you don't know when you'll die, it's a good idea to have the ILIT purchase the policy itself. That way you're free to die anytime afterwards and your ILIT will perform its duties. Be sure the ILIT is in existence before it buys the policy with your funds or your back to the 3 year rule. If the life insurance policy requires premiums to be paid, you can pay those by gifting the premium payments to the ILIT which will, in turn, pay the premiums to the insurance company. Paying premiums helps you reduce your estate too as the money comes out of your estate.Those gifts of premiums, though, would normally add to your lifetime gift for gift tax payment at your death. But you're allowed to exclude $13,000 (for 2011) per year per person from this taxable gift total - if you in fact made that gift during the year.You can take advantage of the $13,000 annual gift exclusion by making sure your ILIT has a 'Crummey provision' in it. That's because the annual gift tax exclusion only pertains to gifts of 'present value' to the giftee (donee). And since your trust is geared to hold its funds until after your death, the only way your gifted premiums can be treated as a gift of present value, is to allow the eventual beneficiary of the policy - or the money you put into a trust - to have access to claim that gift for a least 30 days after you donated it to the trust. That's the Crummey provision. Obviously you need to suggest to the beneficiary to hold off on taking that money.Be sure to use a knowledgeable lawyer to draw up your ILIT so it will achieve all the purposes you intend it to. Discount Automotive Parts for Cost-efficient Auto Care The Coastline and Marine Wildlife: Things to see around Buenos Aires Wildlife in the forests, mountains and pampas: Things to see around Buenos Aires Get RV Insurance And Enjoy Life on Road! What You Should Know About Term Life Insurance Coverage The Need for Life Insurance Continuing Education Life Offers Us Many Chances to Grow Through Physical and Soul Levels Taking All Of The Questions Out of Life Insurance Coverage Varieties And Requirements Understanding the Advantages of Long Term Care Insurance How many life insurance policies can I have? Choosing Long Term Care Insurance Policies and Company Long Term Care Insurance For Less How To Live An Extraordinary Life And Accomplish All Your Dreams