Life insurance is a vehicle that many people use to preserve wealth and provide financial security for their families.
Favorable tax treatment makes life insurance payouts exempt from income taxes; however, proceeds from insurance can be subject to the estate tax. If the policyholder dies and the policy is in his or her name, the value of the benefit will be included in the taxable estate. For this reason, many people choose to transfer their life insurance policies to irrevocable life insurance trusts (ILIT).
When properly drafted, an ILIT can remove life insurance policies from the estate, since the trust is the owner of the policies, not the individual. When the person for whom the policy is written dies, the trust receives the benefit and disburses it according to the rules of the trust, thus avoiding probate and avoiding the estate tax.
An ILIT will allow you to make gifts over a period of time, and can be structured to carry out your wishes after your death. As with all trusts, you designate one or more trustees who are obligated to follow your instructions. An additional benefit of an ILIT is the minimal costs of creating and maintaining this kind of trust. Most importantly, the trust will significantly enhance your estate plan and benefit your heirs.
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