Maintaining a life insurance policy can be a responsible way to ensure that your loved ones are financially secure when you pass. However, you might not know that your life insurance policy could make your final estate subject to state and federal taxes after your passing.
The proceeds from a life insurance policy count towards the taxable value of your estate. Fortunately, an experienced attorney may be able to help you avoid paying more in estate taxes than necessary. Schedule an appointment with a Lombard irrevocable life insurance trust lawyer today to learn more.
After a person dies, everything that he or she owns is considered part of his or her estate. The administrator of the deceased’s estate would be responsible for adding up all the deceased’s property and assets and paying off his or her final debts.
The state and federal government will assess estate tax on any estate over a certain threshold. In Illinois, this tax only applies to estates valued at over $4 million. Estates that are worth less than that generally do not have to pay estate tax.
A life insurance policy and its payable-on-death benefits are considered part of the deceased’s estate and are counted towards the estate’s total value. This means that having a life insurance policy worth several million dollars could result in heirs having to pay estate tax, even if the rest of the deceased’s estate was relatively small.
People in Lombard could avoid adding their life insurance proceeds to the value of their estates by creating irrevocable life insurance trusts (ILITs). The creator or grantor of the ILIT would give up his or her ownership of a life insurance policy and make the trust the owner. In doing so, the grantor would give up his or her right to change, alter, or terminate the trust.
In practice, a grantor may create an ILIT, name a trustee and beneficiaries, and have the trustee apply for a life insurance policy on the life of the grantor on behalf of the trust. The grantor could also transfer ownership of an existing life insurance policy to his or her ILIT. The trust, as a separate legal entity, would then own the policy, and the trustee would distribute its proceeds to the beneficiaries after the grantor’s death.
To fully transfer a life insurance policy to an ILIT, the grantor or owner of the policy must give up all his or her incidents of ownership to the policy. A grantor cannot retain the right to change his or her beneficiaries, assign the policy to another person or entity, or cancel the policy. If the grantor retains incidents of ownership, the trust may not successfully protect the estate from estate taxes.
There are many benefits to establishing an ILIT in Lombard. First, as discussed above, these trusts could transfer the proceeds of a person’s life insurance policies without adding to the taxable value of the deceased’s estate. Doing so could reduce the size of the estate to avoid some or all of the Illinois estate tax.
Creating an ILIT also allows the grantor to decide who receives the proceeds of his or her life insurance policy and might be able to protect this money from creditors. ILITs also reduce the number of assets that must go through probate and allow the beneficiaries to access the proceeds of the policy quickly after the grantor’s death.
Creating an ILIT is an important task that may save your heirs time and money. If you have a sizable life insurance policy, protect its value by speaking with a Lombard irrevocable life insurance trust lawyer today.