What is an Irrevocable Life Insurance Trust?
Most people purchase life insurance policies so they can provide for their loved ones after they pass away. However, if your life insurance policy’s value puts your estate over the exemption limit for estate taxes, the benefit to your loved ones will be reduced. Using an irrevocable life insurance trust, you can eliminate this possibility.
While the vast majority of estates will never be affected by the federal estate tax (which currently has an exemption of $5.49 million), an irrevocable trust can be especially valuable for wealthy individuals looking to reduce their taxes.
Below are a few things you should know about an irrevocable life insurance trust:
- Your trust owns the policy: By transferring your life insurance policy to the trust, the Internal Revenue Service (IRS) no longer considers it to be part of your estate. It will therefore not contribute to your estate’s value. The trust becomes the legal owner of the policy and must be listed as the policy’s beneficiary.
- You no longer have control over the policy: The defining trait of an irrevocable trust is that once you have transferred property into it, you cannot take it back and regain control over the assets. The same is true with irrevocable life insurance trusts. The IRS requires you to give up control over the policy if you are to avoid taxation. However, you can name trust beneficiaries for the funds produced by the trust and determine how those funds will be distributed.
- You still pay premiums: Even though you technically no longer own the policy, you will still pay the premiums. You do this by transferring funds to the trustee, who then pays the premiums on your behalf. If you transfer more than $14,000 in a single year to a person who makes premium payments on your behalf, you may need to pay federal gift taxes.
For more information and guidance on irrevocable life insurance trusts, work with an experienced Florida estate planning lawyer at The Charles Law Offices.