The AE Team
Irrevocable Life Insurance Trust
- What is an Irrevocable Life Insurance Trust?
- Why use life insurance to pay estate taxes?
- How is life insurance “structured” to avoid taxes?
- Do you have to use an Irrevocable Trust to own life insurance?
- Why use an Irrevocable Trust?
- How does an Irrevocable Life Insurance Trust work?
- Are there any limits to the gifts made each year?
- What does the Trustee do with the gifts received?
- What happens when the Grantor (Insured) dies?
- What if Congress changes the exemption amounts?
How is life insurance “structured” to avoid taxes?
For purposes of this discussion, life insurance paid for with after-tax premium dollars are always income tax free to the beneficiary. The problem is that if the person named as the insured owns or otherwise maintains control over the policy, the death benefit, while income tax free, will be included in the insured’s estate for calculation of estate taxes. It can cause a person’s estate otherwise subject to the estate tax to pay additional unnecessary taxes of up to 50% of the death benefit amount. It can also cause a person’s estate, which otherwise would not be subject to the estate tax, to unnecessarily become subject to the estate tax. Don’t forget that there are also several states that impose a separate Inheritance Tax, including IA, IN, KY, TN and PA.