Insurance and Estate Taxes – How They Can Work Together

The saying goes that nothing is certain except death and taxes. But what about taxes that must be paid on assets after your death? When establishing your estate plan, you do not want to burden your beneficiaries with high taxes due to your gifts. Understanding how insurance and estate taxes work can help your heirs avoid paying high taxes.

Life Insurance Policies and Estate Taxes

Life insurance policies are tax-free death benefits that are payable to a named beneficiary or is used to pay for the insured person’s final expenses. In many cases, the life insurance money can be used to pay estate taxes or is set up as a special needs trust.

While life insurance health benefits are generally exempt from income tax, they are not always exempt from estate tax. But if the life insurance policy is owned by an Irrevocable Life Insurance Trust (ILIT or ‘eye-lit’), the proceeds upon death will pass outside the estate, often avoiding federal estate tax.

When deciding on insurance and estate taxes, you need a professional attorney to ensure everything is established correctly.

What is an Irrevocable Life Insurance Trust?

An irrevocable trust means the insured cannot change or undo the trust after it is created. Since the money is in a trust, you can direct who to give the benefits to and how and when they are used.

Using life insurance to fund a trust can also help provide the money needed to cover estate taxes and other expenses that occur after your death. But there are some drawbacks to an ILIT:

• Loss of personal use – you cannot access or change this trust
• Usually not able to be used for retirement purposes, solely for beneficiaries
• Fees and difficulty in establishing

There are also some rules when establishing an ILIT:

• The owner must survive for at least 3 years after the transfer of assets into the trust
• Unless fully paid, funds need to be provided to the trust to pay for the policy premiums
• For a couple, the trust can be set up as a second-to-die policy

With so much at stake – working with an experienced estate planning attorney is a must. We understand that you want to help your beneficiaries avoid high taxes and get the most out of your assets. But your entire estate plan must work together to benefit you and your loved ones.

Oak Brook Estate Planning Attorney

Call us for more information on setting up an estate plan specifically designed for you. We will help you understand insurance and estate taxes, how they work together and how to minimize taxes. Contact one of our lawyers today and schedule an appointment at 630-864-5835. 

AREAS WE SERVE: DuPage, Kane, Lake and Will counties.