Life Insurance Trusts
Insurance Proceeds can provide a much needed source of cash to a grieving family after one’s death. For those with taxable estates however, much of the benefit is often wasted. This is because although proceeds of life insurance are received income tax free by a beneficiary, they are nonetheless included in the estate of the insured owner of the policy and thus subject to estate tax. In order to prevent this undesirable result, we often advise clients to place ownership of their life insurance policies in a separate trust, known as an Irrevocable Life Insurance Trust (“ILIT”). If properly drafted, use of the ILIT will remove the life insurance proceeds from the insured’s estate thereby enhancing the value of the estate and providing additional cash liquidity for the family.
In estates where there is potential federal estate taxes, it is critical that the life insurance proceeds are not included in the insured’s estate, since that would diminish the value of the insurance. Therefore, ILITs are designed to be out of the insured’s estate as well as being excluded from the surviving spouse’s estate and the estates of children and grandchildren. ILIT’s can also be structured as Dynasty Trusts to achieve maximum family generational planning.