Yardley Estate Planning, LLC
Irrevocable Life Insurance Trusts
Irrevocable Life Insurance Trusts, or ILITs (pronounced “eye-
lits”), are quickly becoming an integral part of many clients’
estate plans. Through the proper use of these vehicles, clients
are often able to substantially reduce their expected Federal or
New Jersey Estate Tax burden.
(New Jersey has an Estate Tax; Pennsylvania does not. Both
Pennsylvania and New Jersey have Inheritance Taxes. Life
insurance proceeds are not subject to Inheritance Taxes, but
are includable for Estate Tax purposes.)
The Federal Estate Tax is imposed upon individuals who die
with a taxable estate above the exemption amount, which is
currently $3.5 million (and we still don’t know what it will be
for next year.) New Jersey imposes an Estate Tax on Estates
over $675,000. What many people do not know is that the
face amount of life insurance that you own on your own life is
included in calculating your estate. For many people, it is the
life insurance that throws them over the exemption amount.
Someone in this area who owns their own home, has a
reasonable amount in their 401k or IRA rollover, and two
million dollars or more in life insurance would probably owe an
estate tax upon their death or that of their spouse, even though
they might not think they have a lot of assets. Many
successful people in their 30s and 40s who have not yet
accumulated much often have $1.5 or $2 million in life
insurance.
If you transfer the life insurance you own on your life to an
Irrevocable Life Insurance Trust, or better yet, set up the trust
first and have the trust purchase the insurance, you can
remove the value of the insurance from your estate, possibly
saving a lot of money in estate taxes. In addition to reducing
your estate tax liability, an ILIT may: reduce your need for
insurance since your estate tax bill will be lower; protect the
cash value of your life insurance policy from creditors; and
allow you to control when, how, and why your beneficiaries
receive the proceeds of your policy.
As you would expect, you need to meet specific requirements.
If you gift a life insurance policy to the trust, you need to live
for three years beyond the date of the gift to remove its value
from your estate. Also, you will need to give the beneficiaries
notice of what you have done through a “Crummey Letter”
which is named after the taxpayer who successfully sued the
IRS to allow this strategy. There are a few other minor
requirements. Of course, this is a brief overview of a
somewhat technical concept. If you would like to learn more,
please call or e-mail and I would be happy to go over it with
you.
Irrevocable Life Insurance Trusts, or ILITs (pronounced “eye-
lits”), are quickly becoming an integral part of many clients’
estate plans. Through the proper use of these vehicles, clients
are often able to substantially reduce their expected Federal or
New Jersey Estate Tax burden.
(New Jersey has an Estate Tax; Pennsylvania does not. Both
Pennsylvania and New Jersey have Inheritance Taxes. Life
insurance proceeds are not subject to Inheritance Taxes, but
are includable for Estate Tax purposes.)
The Federal Estate Tax is imposed upon individuals who die
with a taxable estate above the exemption amount, which is
currently $3.5 million (and we still don’t know what it will be
for next year.) New Jersey imposes an Estate Tax on Estates
over $675,000. What many people do not know is that the
face amount of life insurance that you own on your own life is
included in calculating your estate. For many people, it is the
life insurance that throws them over the exemption amount.
Someone in this area who owns their own home, has a
reasonable amount in their 401k or IRA rollover, and two
million dollars or more in life insurance would probably owe an
estate tax upon their death or that of their spouse, even though
they might not think they have a lot of assets. Many
successful people in their 30s and 40s who have not yet
accumulated much often have $1.5 or $2 million in life
insurance.
If you transfer the life insurance you own on your life to an
Irrevocable Life Insurance Trust, or better yet, set up the trust
first and have the trust purchase the insurance, you can
remove the value of the insurance from your estate, possibly
saving a lot of money in estate taxes. In addition to reducing
your estate tax liability, an ILIT may: reduce your need for
insurance since your estate tax bill will be lower; protect the
cash value of your life insurance policy from creditors; and
allow you to control when, how, and why your beneficiaries
receive the proceeds of your policy.
As you would expect, you need to meet specific requirements.
If you gift a life insurance policy to the trust, you need to live
for three years beyond the date of the gift to remove its value
from your estate. Also, you will need to give the beneficiaries
notice of what you have done through a “Crummey Letter”
which is named after the taxpayer who successfully sued the
IRS to allow this strategy. There are a few other minor
requirements. Of course, this is a brief overview of a
somewhat technical concept. If you would like to learn more,
please call or e-mail and I would be happy to go over it with
you.
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| Yardley Estate Planning, LLC 41 University Drive, Suite 400 Newtown, PA 18940 Phone (267) 573-1019 Toll free (877) 251-4393 Fax (267) 604-9164 mgarry@yardleyestate.net www.yardleyestate.net |
