One of the first orders of business that you must address when you are planning your estate is the matter of potential taxation. There is a federal estate tax that high net worth people must contend with, and it can significantly erode the wealth that you are passing along to your loved ones.
At the time of this writing in 2014, the amount of the federal estate tax credit or exclusion is $5.34 million. This is the amount that you could transfer to your heirs tax-free. If your estate exceeds this amount in total value, the estate tax is a factor for you.
When you are evaluating the sum total of your assets, you should understand the fact that life insurance policies that you own personally would be looked upon as part of your taxable estate. It is possible to remove these policies from your estate through the creation of an ILIT or irrevocable life insurance trust.
ILIT for Tax Savings
You could potentially mitigate your estate tax exposure by placing your life insurance policies into an irrevocable life insurance trust. With an ILIT you name a trustee to administer the trust, and you also name a beneficiary.
On the surface you may think that you should name your spouse as the beneficiary of the irrevocable life insurance trust. You can go this route if you want to, but there is another option that may be more advantageous in the long run.
You could make the trust itself the beneficiary of the ILIT. When you are drawing up the trust agreement, you leave instructions that the trustee must follow after you pass away. It would be possible to instruct the trustee to use the insurance policy proceeds to provide your surviving spouse with income throughout his or her life.
Your surviving spouse would benefit from the assets that are contained within the ILIT, but he or she would never actually own the resources directly. As a result, these resources would not be part of his or her taxable estate either, so the tax savings would be compounded.
You could even take things a step further and have the trustee distribute assets to your children after the death of your surviving spouse. Your children need not own the assets directly.
Free Report on Irrevocable Life Insurance Trusts
We make an effort to provide informational resources here on our website. We regularly update this blog, and we also offer a series of special reports.
One of our special reports takes an in-depth look at irrevocable life insurance trusts. If you would like to learn more about these useful tax efficiency tools, download the report. You can access your copy through this link: Free ILIT Report.