Irrevocable Life Insurance Trusts in Gainesville

What is an irrevocable life insurance trust?

An irrevocable life insurance trust (ILIT) is a trust that moves your life insurance policy outside of your taxable estate, meaning that the death payout is no longer subject to the estate tax. This can result in substantial tax savings, as the estate tax is currently 40% of the payout (assuming that your estate is over the exemption amount). Thus, if you have a taxable payout of $1,000,000, the estate tax alone on that payout would be $400,000. But by moving the assets into the ILIT, you can eliminate the estate taxes entirely on the life insurance proceeds.

How does an ILIT work?

When you move your life insurance policy into the ILIT, you move it out of your taxable estate. Because of this, all assets in the ILIT are not subject to the estate tax. Thus, the ILIT shields the life insurance proceeds from being taxed at the 40% rate. After the death payout, the trust can then use the money for the benefit of your heirs. If set up correctly, the trust can transform into an asset protection trust for your heirs, assuring that the money is safe from your heirs’ creditors or divorce proceedings.

However, there are two potential pitfalls that you should be aware of. First, unless you take out a brand new policy for the ILIT, you have to wait three years after moving the policy before it will actually leave your taxable estate. So, if you set up the ILIT and move your policy over before dying six months later, the ILIT will do you no good. However, if you die more than three years after moving the policy, then the ILIT will eliminate the estate taxes on the death payout. The second potential pitfall is that transfers to the ILIT are subject to the gift tax. The solution to this is to use Crummey letters, which eliminate the gift tax on all transfers below the annual exclusion amount.

Who needs an ILIT?

An ILIT is useful if you 1) have an estate tax problem and 2) have or desire a life insurance policy. If you fall into that category, then an ILIT is something that could save your family incredible amounts of money. You have an estate tax problem if your taxable estate will have assets above the exemption amount. Unfortunately, you have no way of knowing what the estate tax exemption will be when you die. The exemption amount is a political number, and it fluctuates frequently. This means that if you have any significant assets at all, it might be wise to see an estate tax lawyer who can tell you if tax planning is needed.

How can I get an ILIT in Gainesville, FL?

If you need an ILIT, then you want to see an estate planning attorney who understands how to plan for federal estate taxes. Blakely Moore is an estate and tax planning lawyer attorney in Gainesville. Blake studied at UF Law under some of the most respected tax law academics alive. If you live in or near Alachua County and and want to talk about whether an ILIT makes sense for you, schedule a free consultation today.