Life Insurance Trusts
Life insurance trusts are one of the more common ways of creating readily available cash for estate taxes and other expenses after death. Many people believe that life insurance proceeds are completely ‘tax-free’. However, this is not always the case. The receipt of life insurance proceeds are not includible as part of the recipient’s taxable income, but depending on ownership of the policy, the proceeds can be includible when determining whether a deceased person’s estate will owe estate or ‘death’ taxes. Because life insurance can be one of the more affordable ways of passing wealth, it becomes very important to know whether the insurance proceeds payable as a result of your death might trigger an estate tax.
When structured properly, life insurance proceeds can remain outside of your estate and as such are not subject to estate taxes. Life insurance trusts (commonly known as ILITs because they are irrevocable – Irrevocable Life Insurance Trusts) can be an effective way of transferring assets out of your estate during your lifetime. For taxable estates, funding a life insurance trust with a policy will provide an almost immediately liquid asset from which estate taxes can thereafter be paid, without the need of selling off, possibly at a significant discount, other assets to raise funds. For estates that aren’t expected to face estate taxation, life insurance trusts can still be a useful tool for transferring wealth to the next generation through an annual gifting program.
Because life insurance trusts are irrevocable, their use should not be implemented without serious thought. Sodoma Law’s Estate Planning attorneys can review your situation and provide a sound recommendation about the use or need for a life insurance trust.
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