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?
Why use life insurance to pay estate taxes?
For persons who die leaving an estate subject to the estate tax, without the use of life insurance, estate assets would have to be liquidated in order to pay estate taxes. This can cause undue hardship on the family, as important assets such as a family business, retirement property or other retirement assets are sold to pay the taxes due. The loss of important assets is coupled with the cost of actually liquidating those assets, leading to significant estate shrinkage. The potential costs include the cost of selling at fire-sale prices to generate cash quickly as the family business is sold for book value, the real estate or securities have to be sold before the market rebounds, or the IRA needs to be liquidated thus also triggering separate income taxes. Add to that the transaction costs of 3% to 10% for liquidation including realtor, escrow and broker fees.
Using life insurance, properly structured to avoid tax on the policy proceeds, will cost on average less than 10% of the amount needed to pay the tax. Just as important, the death benefit makes the cash available as soon as it is needed, avoiding the need to liquidate the important estate assets.