Even a with modest estate, you can end up owing hundreds of thousands of dollars in estate taxes. Why?
A life insurance policy with a substantial death benefit can cost a lot in estate taxes.
Life insurance proceeds are not subject to federal income tax. However, the proceeds are considered part of the taxable estate and are subject to federal estate tax as a result.
What is a Life Insurance Trust?
The solution to this problem is to create an Irrevocable Life Insurance Trust (sometimes referred to as an ILIT) that will own the policy and receive the policy proceeds on your death.
A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse.
It also protects the trust beneficiaries from creditors, their own “excesses,” and spouses in the event of divorce.
Moreover, the trust also provides reliable management for the trust assets.
Ways a Life Insurance Trust Can Work for You
Minimizing Gift Taxes
You can create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life.
Then you contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies.
If the trust is properly drafted, and administrative protocols are followed, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion, so you won’t have to pay gift tax on the contributions.
Manage Distributions to Your Heirs
The life insurance trust typically provides that—during your lifetime—principal and income (at the trustee’s discretion) may be used for the benefit of your spouse and descendants.
This allows indirect access to the cash surrender value of the life insurance policies owned by the trust and permits the trust to be terminated, if desired, despite its being irrevocable.
On your death, the trust continues for the benefit of your spouse during his or her lifetime.
Your spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal.
On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of your descendants.
If you own a life insurance policy with a significant death benefit, an Irrevocable Life Insurance Trust, ILIT, may be of substantial benefit to you.
If you’d like to accomplish a particular tax or estate planning objective using an ILIT, please contact Smith Patrick CPA so that we can discuss setting up the appropriate irrevocable life insurance trust that will meet your needs.
More Information
If you have questions, reach out to us at 314-961-1600 or contact us to discuss your situation.
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Smith Patrick CPA
Smith Patrick CPAs is a growing firm based in St. Louis, MO. From accounting to wealth management, our team takes a consultative approach. We provide excellent, personal service to small businesses and financially active individuals. It’s our goal to help you to make the best decisions, saving you money and headaches.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.
