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T&E TALK: Life Insurance Owner? Consider Establishing an ILIT

Posted by Marco Svagna, CPA on Sep 21, 2015 7:00:00 AM

An irrevocable life insurance trust (ILIT) could help you eliminate estate tax liability from any life insurance policies you own at the time of your death. 

The proceeds received from policies owned by you as an individual will be included in your estate and subject to significant estate taxes.  As an alternative, an ILIT can be created to have ownership of your policies.  As the owner, the ILIT will pay the premiums on your life insurance policies.  Any proceeds will pass to the trust after your death; they will not be included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.

For example, a $10 million life insurance policy owned by an ILIT, not by you, could reduce your estate taxes by as much as $4 million if the full value is subject to estate tax and the rate is still 40%.

Keep in mind that ILITs have some disadvantages.  A primary one to consider is that once the ILIT has been established, you will lose some control over the insurance policy. Once you transfer a policy to the trust, you are no longer able to assign, surrender or cancel the policy; borrow against or withdraw from the policy's cash value; or make any changes to the designated beneficiaries.

Questions? If life insurance is part of your estate plan and you're concerned about your tax liability, please contact us.

Marco Svagna, a tax partner at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on estate and income tax issues, succession and financial planning, and other matters relating to the preservation of wealth.

Topics: T&E TALK

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