Modern Times: Renaissance In Life Insurance Trusts

An ILIT can be “funded” or “unfunded.” If it’s funded, not only do you transfer ownership of the life insurance policy to the trust, you also transfer other assets that may be used to pay the premiums. The additional property may be in the form of cash, securities, or some other asset. The major drawback of this approach is that the income the trust generates is generally taxable to you.

How much estate tax flexibility do you have under current law? Plenty. Thanks to the American Taxpayer Relief Act of 2012 (ATRA), an exemption of $5 million (indexed to $5.49 million in 2017) effectively shelters bequests to non-spousal beneficiaries like your children and grandchildren. In other words, if you remove life insurance proceeds from your estate through an ILIT, you can still leave another $5.45 million to your heirs free of estate tax. ATRA also establishes a top federal estate tax rate of 40%.

For example, consider the implications if you have a policy with a $1 million death benefit. Without an ILIT, your family might have to forfeit $400,000 of the proceeds to Uncle Sam.

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This article was written by a professional financial journalist for Meg Green & Associates. and is not intended as legal or investment advice.

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