Irrevocable Life Insurance Trust (“ILIT”)
The answer, as is often the case with lawyers, is “it depends.” Life insurance proceeds/death benefits are, as a general rule, income tax free to the named beneficiaries.
However, life insurance proceeds/death benefits are more often than not includable in an individuals’ taxable estate upon their death. If an individual has what the Internal Revenue Service (“IRS”) calls “incidence of ownership” the life insurance proceeds will be subject to estate tax within the estate of the deceased no matter who the named beneficiary is. Therefore, the ownership, or control, of the life insurance policy will dictate whether the proceeds are subject to estate tax liability.
An Irrevocable Life Insurance Trust (“ILIT”), sometimes referred to as a Wealth Replacement Trust, is a trust that is specifically designed to own a life insurance policy (or policies) so that the proceeds/death benefit is not included in the insured’s taxable estate. Once the ILIT is created and the premiums have been gifted to the Trust the Trustee pays the premiums on the policy. Upon the insured’s death the Trustee of the ILIT collects the death benefits and distributes the money according to the terms of the trust.
Since the insurance is owned by the ILIT the proceeds are not included in the insured’s taxable estate. The purpose of the ILIT is keep the IRS from getting approximately 50% of the insurance proceeds and to protect your loved ones. If you have an estate with assets that might exceed the then current maximum estate tax deduction, the proceeds from a life insurance policy that you own or have too much control over will be. By properly drafting and following the rules of an ILIT, you can keep the IRS from getting any of the proceeds/death benefit.
To discuss a estate planning matter confidentially or for information, please contact Danny Wexler, Attorney at Law @ (714) 241.1919 or email d.wexler@qwllp.com.
