Estate Planning
Irrevocable Life Insurance Trust (“ILIT”)
Many people aren’t aware that all of the proceeds from life insurance policies that they own at death will be included their estate for estate tax purposes. This is because if the policy owner can withdraw the cash value and change the beneficiary, then the policy owner will be deemed to have incidents of ownership over the proceeds and the IRS and, if applicable, state taxing authorities, can then tax the proceeds at death. Thus, if you own a $2,000,000 term life insurance policy at the time of your death, then the insurance proceeds will already use up more than half of your $3,500,000 exemption from federal estate taxes. The result is even worse if your state collects estate taxes since most state estate tax exemptions remain at or below $1,000,000
How an Irrevocable Life Insurance Trust Works
One way to avoid the taxing of life insurance proceeds at death is to establish an Irrevocable Life Insurance Trust or ILIT for short. An JUT is a type of irrevocable trust that is specififically designed to hold and own life insurance policies. Once the JUT has been set up, you will transfer ownership of your life insurance policies to the Trustee of the JUT. While you can’t be a Trustee of the ILIT - otherwise you’ll be deemed to have incidents of ownership in the life insurance - your spouse and/or children can be Trustees
Once you’ve transferred ownership of the life insurance to the Trustee of the JUT, you will have given up all of your incidents of ownership over the policies. Since you’ll no longer own the policies, the proceeds can’t be taxed in your estate when you die.
Who Are the Beneficiaries of an ILIT
The JUT will also be designated as the primary benefificiary of your life insurance policies. Thus, after you die, the insurance proceeds will be deposited into the ILIT and held in trust for the benefit of your spouse during his or her remaining lifetime, and then the balance will pass to your children or other beneficiaries.
Aside from this, the JUT can provide your family with a quick source of cash to pay your estate tax bill while at the same time not increase your overall estate tax burden. Another benefifit of the IUIT is that since the insurance proceeds will be held in trust for the benefifit of your spouse instead of going directly to your spouse, the proceeds can’t be taxed in your spouse’s estate either. And you can also take the ILIT one step further and set it up as a Dynasty Trust or Generation Skipping Trust for the benefit of your children and future generations.
Second to Die Life Insurance
Second to Die Life Insurance, also known as Survivorship Life Insurance or Joint and Survivor Insurance, is an estate planning solution and estate planning tool. These insurance policies insure the lives of two people, typically a husband and a wife. The death benefit is not paid to the beneficiary until the death of the second insured.