Irrevocable Life Insurance Trust

Life Insurance, income tax free, but not estate tax free

One of the largest misconceptions in Estate Planning is life insurance being tax free. It is true that the payment of life insurance is tax free to the beneficiaries. However, if the life insurance policy is owned or controlled by the departed, the Internal Revenue Code considers this to be transferred to the decedents because of death. Thus, it is added to the gross estate of the departed.

To avoid a hit on estate taxes, life insurance policies can be owned by an Irrevocable Life Insurance Trust, or ILIT. Some policies that are in existence can be transferred to an Irrevocable Life Insurance Trust. Ideally, the Irrevocable Life Insurance Trust would be established prior to the purchase of the life insurance policy.

Maintenance of an Irrevocable Life Insurance Trust is required annually, which is a service we provide clients. The Trustee you select for the Irrevocable Life Insurance Trust will need guidance on receipt and documentation of gifts to the Trust, payment of life insurance premiums, and the sending of notices to beneficiaries on an annual basis.

With a properly formed and maintained Irrevocable Life Insurance Trust, the entire life insurance benefit is paid into to trust, the funds distributed by the trustee, and the entire amount avoids both State and Federal Estate Taxes.