Financial success brings many rewards, but from a legacy planning perspective, estate taxes can enter the picture. There is a federal estate tax that is applicable in every state, and here in Connecticut, we have a state-level estate tax.
Fortunately, there are steps that you can take to mitigate the burden if taxation will be a factor for your estate. This blog explores how an ILIT can be a vital part of your estate tax efficiency strategy, offering tax advantages and ensuring your beneficiaries are well taken care of when you are gone.
Life Insurance in Estate Planning
Life insurance policies are commonly used in estate planning, providing a lump sum to beneficiaries upon the policyholder’s death. However, the death benefit is typically considered part of your taxable estate, potentially increasing the estate tax burden.
The Solution: Irrevocable Life Insurance Trust
An ILIT is a trust that owns your life insurance policy. This arrangement separates the policy from your estate, offering several benefits:
- Estate Tax Reduction: By holding the life insurance policy in an ILIT, its proceeds are excluded from your taxable estate, reducing the overall estate tax liability.
- Controlled Distribution: The ILIT allows you to dictate how, when, and to whom the proceeds are distributed, offering you greater control over the disbursement.
- Protection from Creditors: Assets in an ILIT, including the insurance proceeds, are generally shielded from creditors, ensuring they reach your intended beneficiaries.
- Bypassing Probate: The ILIT bypasses the probate process, facilitating a quicker and more private distribution of assets.
Setting Up an ILIT
Creating an ILIT involves a few key steps:
- Establishing the Trust: You work with an attorney to create the trust, defining its terms and appointing a trustee.
- Transferring Ownership: The life insurance policy is transferred to the ILIT. This act is irrevocable; you can’t reclaim ownership once it’s done.
- Funding Premium Payments: The trust pays the policy premiums. You can gift money to the trust for this purpose, keeping in mind the gift tax implications.
- Managing the Proceeds: Upon your death, the insurance payout goes to the ILIT, which then distributes it to your beneficiaries per the trust’s terms.
Key Considerations
- Irrevocability: An ILIT is irrevocable. Once established, you can’t change its terms or reclaim the policy.
- Gift Tax Rules: Contributions to the ILIT to pay premiums may count against your gift tax exemption.
- Three-Year Rule: If you die within three years of transferring an existing policy to an ILIT, its proceeds may still be included in your estate.
Summing It Up
An ILIT can be a vital component of your estate planning strategy, particularly for those concerned about the impact of estate taxes. It offers a way to provide for your heirs while minimizing the estate tax liability.
While setting up an ILIT requires careful planning and consideration of tax rules, the benefits it offers in protecting and preserving your estate for your beneficiaries are substantial.
Attend a Complimentary Learning Event!
We know that a lot of people have questions about the estate planning process, and we go the extra mile to provide answers through our seminars. Our attorneys conduct these sessions on an ongoing basis at convenient locations throughout our service areas.
You will learn a lot if you join us, and this is an ideal opportunity to connect with our firm for the first time. There is no charge to attend the seminars, but we ask that you register in advance so we can reserve your spot.
To see the dates and obtain more information, visit this page: Estate Planning Seminars.
Need Help Now?
If you have learned enough to know that it is time for you to work with a lawyer to put your plan in place, we can help. You can send us a message or call us at 860-548-1000 to request a consultation at our Glastonbury or Westport, CT estate planning offices.
In May 2023, Diana M. O’Rourke joined Nirenstein, Horowitz & Associates, P.C. as an associate attorney in the trust administration department.Diana has five years of experience practicing in the areas of estate administration, estate planning and elder law.She is admitted to practice in the State of Connecticut and is a member of the Connecticut Bar Association, where she is part of the Estate & Probate section and the Elder Law section. She is also a member of the American Academy of Estate Planning Attorneys.