Many people are surprised to learn that although insurance proceeds may not be taxable for income tax purpose, they are still included in your gross estate for estate tax purposes. Fortunately, with the help of an experienced attorney you can remove these proceeds from your estate so that they are not subject to the estate tax. This is commonly done by using what is called Irrevocable Life Insurance Trust (ILIT).
An ILIT is a trust specifically designed to remove life insurance proceeds from your gross estate while still providing the same benefits to your loved ones as you originally intended in order to avoid unnecessary estate taxes. For example, Massachusetts currently excludes $1,000,000 from state estate taxes. So, if your current real and personal property is valued at $750,000 and you have $500,000 life insurance policy then your gross estate is $1,250,000 ($750,000 +$ 500,000) and it therefore exceeds the exemption by $250,000 ($1,250,000-$1,000,000). As a result, you will face an estate tax on $250,000. However, if you were to properly set up and found an ILIT then $500,000 would not be included in your gross estate and you would save yourself and your family thousands in estate taxes.
While simple in theory, an ILIT’s implementation is more complex. In order for the proceeds to remain out of your estate it is important that the trust is structured so that there are no signs or incidents of ownership on your part. What this means is that you cannot exert any control or influence over the trust or the policy within it-otherwise the government will find that such proceeds should still be deemed part of your estate even though the irrevocable trust is listed as the owner. Two common examples (or mistakes) of incidents of ownership are when the person lists him or herself as the trustee of the ILIT or when the person pays life insurance premiums for the trust.
Given the high stakes and complexity involved with an ILIT you may want to consult and experienced attorney. For more specific information or to determine whether an ILIT may be right for you please feel free to contact us at • (781) 397-1700 • [email protected] • www.simmonsandschiavo.com