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While gains from a life insurance policy are not treated as income for tax purposes, if the life insurance policy was held by the decedent within three years of his or her death, any amount of insurance income on the decedent’s estate is taxed. will be imposed. above the property tax limit. OK, now in plain English. If you take out a life insurance policy on your own, fund the policy during your life, and leave the proceeds to your spouse or other family members, they will pay larger taxes. So what can you do to avoid this?
Creating an irrevocable life insurance trust (or “ILIT”) will protect your family from the burden of estate taxes when they receive the benefits of a life insurance policy. This estate tax savings can be achieved either by setting up an ILIT by the insured and surrendering an existing life insurance policy to the trust, or by purchasing a new policy on the life of the insured by the trust itself. The insurance will be excluded from the property of the insured as the insured will not have the policy at the time of death.
The three requirements are: (1) the insured must not own or retain any event of ownership in the insurance, (2) the income must be payable to the trust rather than the estate, and (3) if the policies are issued by the insured For the trust, the life assured should be alive for 3 years for the gift to take place. To avoid any gift tax As a result, borrow only against the existing life insurance policy for the amount of equity/value already acquired since the inception of the policy.
An ILIT also provides the benefit of dictating who gets the money, at what age they get the money, and under what circumstances they can get the money. For example, you wouldn’t want your 7-year-old to inherit $2 million in a lump sum. How much candy and video games do they really need? Instead, the ILIT can name a trustee and pay for the child’s needs until the child reaches an age appropriate for inheritance, such as 18, 21, or 25. You can see that your child is looked after but not given the opportunity. They squander the heritage by wasteful expenditure.
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