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Place Your Trust in Insurance and Your Insurance in Trust

Although benefits received from a life insurance policy are not treated as income for tax purposes, if the life insurance policy was owned by the decedent within three years of the decedent’s death, the decedent’s estate deceased will be taxed on any amount of insurance proceeds. above the wealth tax threshold. OK, now in plain English. If you take out a life insurance policy on your life, fund the policy during your lifetime and leave the proceeds to your spouse or other family member, they will have to pay significant taxes. So what can you do to prevent it?

Creating an irrevocable life insurance policy (or “ILIT”) will protect your family from the burden of estate taxes upon receiving the benefits of the life insurance policy. This estate tax savings can be achieved by the insured establishing an ILIT and granting existing life insurance policies to the trust, or by purchasing a new life policy of the insured The insurance will be excluded from the insured’s estate because the insured will not own the policy at the time of death.

There are three requirements: (1) the insured must not own or retain any property incident to the insurance, (2) the proceeds must be paid to the trust rather than the estate, and (3) if the policies are offered by the insured. in the trust, the insured must survive the gift for 3 years. To avoid any gift tax consequences, you only need to borrow against your existing life insurance policy for the amount of capital/value that the policy has already achieved since you took it up.

An ILIT also offers the advantage of instructing who gets the money, at what age they get it and under what conditions they can get the money. For example, you wouldn’t want your 7-year-old son to inherit $2 million in one lump sum. How much candy and video games do they really need? Instead, the ILIT can appoint a trustee and pay for the child’s needs until the child reaches an appropriate inheritance age, such as 18, 21 or 25. You can see that your child is being cared for but does not have the opportunity to do so. spend the inheritance frivolously.

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