Why would I want my irrevocable trust to own my life insurance?

If you own life insurance, it is included in your taxable estate and the proceeds will be taxable for federal estate tax purposes. So, in 2009, an individual is allowed a federal estate tax exemption on their first $3.5 million of assets, including all life insurance policies in their name. (This fact comes as a surprise to many people but this treatment of insurance proceeds dates back almost to the inception of the federal estate tax.) If life insurance policies are owned by a properly structured ILIT, the proceeds will be free of the estate tax.

What if I don't own my insurance but control it through some one else?

Even if you do not own your life insurance in your name, the IRS may determine you to be the owner and therefore liable for federal estate taxes on the policy proceeds. Your life insurance will be included in your taxable estate as long as you possess any incidents of ownership for federal estate tax purposes. Incidents of ownership include your rights to borrow on a policy or pledge as collateral, name or change the beneficiary, and assign the policy to someone else.

If you maintain any right to a life insurance policy, the IRS will take the position that you retained incidents of ownership and will include the proceeds in your taxable estate. With a properly structured ILIT, you no longer retain any incidents of ownership under the IRS definitions and will not be liable for federal estate taxes.

What is the theory behind an ILIT?

Because the trust is irrevocable, you do not have incidents of ownership in it or in the life insurance policies owned by it. An irrovocable trust is a trust that can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.

This is the opposite of a "revocable trust", which allows the grantor to modify the trust. While the tax rules will vary between jurisdictions, in most cases, the grantor can't receive these benefits if he or she is the trustee of the trust. This fact often leads to the consideration of employing a corporate trustee to serve as the fiduciary administrator over the trust assets.

Thus the proceeds of those policies will not be taxed upon your death nor will they be taxed upon the death of your spouse if he or she survives you. They completely avoid the federal estate tax.

You are able to control the disposition of the policy proceeds through your trust instructions as to:

1. Who the trustees will be while you are alive, upon your disability, and upon your death.
2. How the proceeds will be distributed to your beneficiaries or left in trust

Read more...

What is an irrevocable life insurance trust?

An irrevocable life insurance trust (ILIT) is an irrevocable trust that is created to own and be the beneficiary of life insurance policies on the trust maker's life. A reason to use this type of trust is to remove the insurance proceeds from a person's taxable estate. Remember, that normally when you own a life insurance policy, the proceeds from that policy are included when calculating your taxable estate for tax purposes.

Read more...

Essentials: How Estate Taxes Work

Far too many Americans have a silent partner in everything they earn and accumulate in their life. Some do not know or even realize that they have this silent partner. While others choose to ignore their partner or put off dealing with their 'partnership' situation until 'later.' In either case, without a properly written and witnessed plan in place, their silent partner stands to get paid a large percentage of everything they own when they pass away. Who is this silent partner? The federal government, of course. How does this occur? Estate Taxes. [Note-Your state government may also be in line as a silent partner too, depending on which state(s) your reside and own assets.]

"Estate Tax - The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death."

Source IRS.gov

There is only one way to pass all of your assets to another person without paying estate taxes - by giving 100% of your estate to your spouse. And still, this is not an automatic assumption, proper preparation must be made to avail yourself of this benefit. If any other heirs, excluding your spouse, obtains assets from your estate, tax liabilities may be incurred. There are five significant types of taxes that your estate or your heirs may need to pay upon your passing:

• Capital gains taxes
• Federal estate taxes, (also referred to as "death taxes")
• Inheritance taxes
• State estate taxes, (depending on the laws of your state)
• Income taxes

It is critical to completely grasp what these five taxes are, particularly for minimizing the amount of taxes that will be taken out of your estate that is intended to be passed on to your heirs. You have worked a lifetime to accumulate and safeguard your hard earned assets, don't you want your heirs to receive as much as possible instead of sending an unnecessary check to Uncle Sam? It is simple, PLAN, and you keep more. Continue reading the Essentials series on http://Legacy-Lawyer.com and take the time to understand which of the above taxes might apply to you, your estate and your heirs. It also may be advisable that you speak with a qualified local tax advisor to answer your specific estate tax questions.

Read more...

Who needs Legacy & Estate Planning

Contrary to popular belief, Legacy & Estate Planning isn't just for millionaires - it's for anyone who cares about what happens to their assets after they pass or who desires to leave a record for future generations to be able to access.

That said, Legacy & Estate Planning is particularly important for people in a number of basic life situations:

Married Couples: Each spouse must have a separate will. Joint wills can create legal issues if you both pass within a few weeks or months of each other.

Divorced Couples: Make sure your assets go to the "right" people, especially if you'd prefer that they not go to your former spouse's new partner and his or her children. To protect your own children, you may need to establish a trust.

Business Owners: Create a succession plan that specifies what should happen to your business, or your equity in the business, if you become incapacitated or pass away. Be sure that the business has enough cash on hand to survive the transition to new ownership.

Future Millionaires: Currently, the estate tax provides an exemption for estates valued at $2 million or less (it will rise to $3.5 million in 2009). This exemption has historically been $1 million and will most likely revert to that level in the year 2011. As a general guideline, if your estate currently totals $1 million or more - or has a strong prospect of exceeding $1 million in value during your lifetime - you should establish trusts to protect assets you may have beyond the $1 million benchmark.

(Special note: Many people are not aware that life insurance proceeds are included in your taxable gross estate and should be included when calculating potential estate tax liabilities.)

Professional Athletes: The unique demands and rewards of excelling as a professional athlete create unique needs and opportunities for both estate and legacy planning. Most sports stars understand the necessity to protect their hard earned dollars, but often fail to receive proper advice and counsel from those charged with directing their affairs. From issues of caring for your family and loved ones to handling the affairs of off-the-field ventures and charitable foundations require the consultation of expert counsel.

Entertainers & Artists: Those who hold valuable intellectual property rights, (copyrights, trademarks, etc.), or derive income from royalty payments need to consider special plans to deal with these unique issues.

SOURCE:
We offer many thanks to the talented hand of Robert Weber whose work was originally published in The New Yorker August 16, 1999.

Read more...