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Many people do not realize that the proceeds of a South Florida life insurance policy are added to your estate for estate tax purposes if the policy was held by the decedent during the last 3 years of their life. This is the case with more than 90 percent of all life insurance policies. While the beneficiary is not taxed on the income directly, the estate will be taxed at the 55 percent level beginning in 2011. Most of the time, the beneficiary of life insurance is also the representative of the estate. This means that if your plan is not structured properly, the government can tax your family’s travel.
Because of the massive tax implications, an irrevocable life insurance trust (“ILIT”) is quite useful for South Florida estate planning purposes. An ILIT is a legal instrument prepared by a South Florida estate planning attorney for the purpose of removing life insurance from your estate in order to reduce taxes and increase asset protection. You can designate your spouse, child, or other appropriate party as a beneficiary of the trust.
You can also provide detailed guidelines to the trustee of the ILIT, including how life insurance payments should be distributed, when the trustee should make payments, make loans or investments, and what to do with the family business. who receives assets upon the death or disability of your original beneficiaries, and when to terminate the trust. ILIT gives you control of money from beyond the grave and protects your children from unnecessary liability.
As you can see, structuring your life insurance policy so that the ILIT holds the life insurance benefits is useful for achieving several goals, including:
1. Limiting or eliminating the property tax;
2. Increasing the level of assets available to your spouse, children and other loved ones or entities after you are gone; And
3. Providing additional liquidity to a cash strapped estate or business.
Since the ILIT is a separate South Florida legal entity that is held out of your property, the IRS cannot levy a fee. property tax on assets within the ILIT because they are outside your control. Due to the fact that you are able to spell out all of your goals and wishes in the trust document, and because typically the only asset inside the trust is your life insurance during your lifetime, it is logical to give up control in exchange for all the tax benefits. For. The trustee will be the applicant, owner and beneficiary of your life insurance, so the income will never pass through your taxable estate and the estate tax will be reduced by a total of 55 percent of the life insurance benefit.
Another way to avoid estate taxes on your life is to have your spouse or children live with you and act as beneficiaries of a South Florida life insurance policy on your life; However, the ILIT has the added benefit of keeping undistributed income from the taxable estate of your beneficiaries. Properly planned ILITs will limit or eliminate estate taxes and skip taxes for multiple generations.
An ILIT can also help you increase the assets available to your beneficiaries as it makes it easier to own one or more policies of life insurance. The South Florida trustee has the trust document as an efficient road map to follow with regards to purchase, premium payment and distribution of proceeds. ILIT infuses cash into your assets by making distributions, purchases or loans as needed. The trustee of the ILIT makes a fair distribution of the cash proceeds to cover debts, taxes, and funeral expenses. The trustee can also purchase some or all of the business with the cash proceeds and run the business until the children are grown. The trustee can also make appropriate loans for spouses, children, and businesses.
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