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Life Insurance Trust

An Irrevocable Life Insurance Trust can be an excellent device to transfer large sums of wealth to your heirs, totally free of gift and estate taxes. It can also provide the means to pay for death taxes on larger estates.

The estate planning issues addressed by an Irrevocable Life Insurance Trust (ILIT) are the following:

(1) In a majority of cases people name themselves as the owner of their own life insurance policies. This is a mistake where that person's estate is likely to exceed the maximum amount of estate tax exemptions. If the insured person is the owner of his or her own policy, the death benefit is included in his or her estate. The death benefit often pushes the estate value over the exempt amount.

(2) Even without life insurance an estate may be larger than the death tax exemptions and subject to substantial taxation. That taxation can have a side effect that is very negative. For example, suppose that an estate owes several hundred thousand dollars of estate tax. The estate may have plenty of net worth, but may consist of property which cannot be easily liquidated, especially at full value. The tax laws allow the estate only nine months to pay the estate taxes. Their heirs are often forced to start a fire sale of the estate's assets to meet the deadline. This forced liquidation may lose a lot more money on top of the estate taxes.

(3) You do not want your heirs to have access to large amounts of money all at once or before reaching a certain age or have money subject to your heirs' creditors or to their divorce. The terms of the ILIT can protect your heirs in those situations.

(4) You would like to leave more to your heirs than your present estate allows. The use of life insurance contained in an ILIT will allow for that.

An ILIT provides solutions to the above issues. This is done by placing a life insurance policy inside a special trust or by arranging for the trust to purchase the insurance from the outset. It works as follows:

The ILIT is setup by the person desiring to solve one or all of the above issues pertaining to their estate and it is administered by an independent trustee or by one of the creator's adult children. The insurance policy which is most often on the life of the creator is owned by the trust and the beneficiaries of the trust are the beneficiaries of the policy. In order to conform with estate and gift tax laws the trust must pay the premiums on the policy, but the creator usually provide the required funds for payment of the premiums.

The trust can contain provisions which allow the death benefit to cater to any of your family and estate planning goals. For example, the trust could specify that your children could get only 1/3 of their share at age 21, then another 1/3 at 25, and so on. The trust could specify that proceeds shall be provided to care for your spouse for his or her life, with the balance of trust funds going to your children with certain specified controls.

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