The failure to create an Irrevocable Life Insurance Trust (ILIT) is easily one of estate planning’s costliest mistakes. While most people know that life insurance proceeds are exempt from income tax, many do not realize that those same proceeds are included in the decedent’s gross estate for estate tax purposes. However, life insurance proceeds do not have to result in a significant estate tax problem in the event of death. By creating an ILIT and transferring the ownership of the policy to the trust, estate tax at the death of the insured (and the beneficiaries) will be avoided, at least with regard to the insurance proceeds. For a policy already in existence that is transferred to an ILIT, the insured must survive by 3 years for the proceeds to escape taxation. A newly issued policy in the name of the trust is immediately exempt.
Many clients are reluctant to set up an ILIT because of the cost which, in reality, is comparatively very little. The cost of comprehensive automobile insurance on a $25,000 vehicle is significantly more expensive than the one-time expense of creating an ILIT that could avoid many thousands of dollars of estate taxes. Now you know why the failure to create an ILIT is one of estate planning’s costliest mistakes. An ILIT is quickly and easily implemented by an experienced estate planning attorney, will not limit or complicate the ownership of assets, and is a bargain in comparison to the benefit it will provide.
For more information on ILITs, please contact Nic Wenner at 612-355-2202.