Irrevocable Life Insurance Trust

An irrevocable life insurance trust is the easiest way to escape estate taxes. A lot of people are unaware of the fact that the benefits from their life insurances are subject to federal taxation. As a result when you pass away the insurance proceeds will be included in your estate and your family will have to pay a large amount of money within 9 months of your death( usually about 45-55 % of the estate value). Due to the fact that the estate usually lacks sufficient cash, the family members are often forced to sell some of the assets in order to cover the cost of the estate tax. However an irrevocable insurance trust is the ideal loophole for decreasing or even eliminating estate taxes.

The trust works in a very simple manner. You create the trust and then you use it in order to sell your insurance policy. Thus the trust becomes both the beneficiary and the owner of the life insurance policy. As you no longer own the policy the government will not be able to include the insurance benefits in your estate and you will therefore be spared the estate tax. However keep in mind the fact that you can not be named the trustee therefore choose your beneficiaries wisely. The money will be included in the irrevocable life insurance trust for the benefit of your spouse (which is usually the beneficiary of the trust). Furthermore your family can also use some of the money in the trust in order to pay the remaining estate taxes. After your spouse will pass away the life insurance proceeds will be passed on to your children or other beneficiaries.

As suggested by the name of the trust, in order to escape estate taxes your decision must be irrevocable. Once you relinquish control of the insurance policy you will no longer be able to make any modifications to it and you will no longer be able to pay premiums. However in order to keep the insurance running you can have your spouse take care of the life insurance quotes. It is advised to create the irrevocable life insurance trust as soon as possible. If you were to pass away within three years of creating the trust, you will have missed your tax loophole. According to IRS regulations is less than three years pass after creating the trust the insurance proceeds will be subject to federal taxation. Before establishing such a trust you should make sure that you don’t fall under the exemption category. Usually estates that have a lower value that $ 5 million dollars are spared estate taxes.

However keep in mind that even if your estate is smaller than $5 million the insurance proceeded will still be subject to taxation unless they are protected by an irrevocable trust.