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Friday, November 20, 2009
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Advanced Life Insurance
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Call us at (800) 940-3002
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The Basics of an Irrevocable Life Insurance Trust
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DISCLAIMER: The purpose of this information is to provide general information which
is subject to change and is specific to state law.
ReliaQuote is not providing legal advice. If you have a specific legal issue
or accounting issue, you should consult with a lawyer who is licensed to practice
law in your jurisdiction or a certified public accountant familiar with tax regulations
in your jurisdiction. |
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The irrevocable life insurance trust (ILIT) is used to shield assets, in this case
life insurance, by removing the ownership and control of the policy from the estate.
Life insurance is a common tool used to fund estate
taxes and expenses upon the death of an individual and the transfer of a large estate.
For married couples, a joint life insurance
policy is commonly used because it insures both lives and pays a death benefit upon
the death of the second spouse (when estate taxes will be due). In addition, the
annual premium for this type of policy is often considerably less than a policy
purchased on one person's life. If the life insurance policy is not removed from
the estate then the proceeds of the policy will also be subject to estate taxes.
Ideally the trust should be created before the life insurance policy is applied
for. After the trust is created the trustee applies for a life insurance policy
and makes the trust the owner and beneficiary. If a life insurance policy is already
in existence before the trust is created, then the policy should be gifted into
the trust by the policyowner. This is done by changing
the owner and beneficiary of the policy to the trust. If a life insurance policy
is transferred into a trust that was created after the policy was issued then the
transfer is subject to the three-year rule. The three-year rule states that if a
death benefit is paid within three years of the transfer then the proceeds will
be included in the grantors estate and thereby subject to estate taxes. The
premiums for the life insurance policy in an irrevocable trust are paid
for by the trustee with gifts made to the trust by the grantor and spouse. The trustee
administers the trust and any distributions. Upon the death of the second spouse,
a joint life insurance policy (otherwise known as a second-to-die policy) will pay
a death benefit to the trust. The trustee will then distribute the life insurance
proceeds according to the terms of the trust document. This type of arrangement
is valuable because it can provide the liquidity and income to pay the estate taxes
and expenses immediately so that the estate can remain intact when passed to the
heirs.
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