For estates that are likely to be subject to estate tax, a Naperville irrevocable life insurance trust could be an extremely valuable tool for reducing tax liability. When an irrevocable life insurance trust is properly established, proceeds of policy that would otherwise be included in the taxable estate are instead excluded.
In many cases, life insurance proceeds are the single most valuable asset in an estate and the amount of the proceeds could drive the value of an estate over the state tax limit, triggering estate tax liability. Removing the proceeds from the estate could therefore keep the estate below the threshold for estate tax.
A Naperville irrevocable life insurance trust must comply with legal requirements including avoiding retention of “incidents of ownership” in order for the trust to accomplish its intended purpose. Assistance from an experienced trusts and estates lawyer is advised when creating an irrevocable life insurance trust.
An individual may either transfer ownership of an existing life insurance policy to a Naperville irrevocable life insurance trust or create the trust and enable the trust to purchase a life insurance policy. If someone transfers an existing policy, the death benefits could still be included in the estate if the insured individual dies within three years of the transfer.
Having the trust purchase a new policy avoids this potential problem and also prevents gift tax liability. The value of the transfer, for gift tax purposes, is the terminal reserve value of the policy and not the death benefit.
For a Naperville irrevocable life insurance trust to be used successfully to keep death benefits from becoming part of a taxable estate, the insured individual must not retain any incidents of ownership over the life insurance policy. Incidents of ownership refer to the ability to take certain actions with respect to the life insurance policy.
When ownership of the policy transfers to the trust, the person insured gives up the ability to cancel the policy, assign the policy, or change beneficiaries. As a practical matter, while the insured individual may not technically cancel the policy, they could allow it to lapse by not providing money in the trust to cover the cost of premiums.
As with any trust, an irrevocable life insurance trust requires a trustee. In many cases, it may be best if someone other than the insured person serves as trustee to demonstrate that the insured does not retain incidents of ownership. If the terms of the trust do not permit the trustee to exercise any discretion, however, it could be possible to have the insured named as trustee.
The trustee would need to take responsibility for paying premiums with money received from the creator of the policy. In addition, the trustee or a successor trustee will receive the proceeds after the death of the insured and distribute those proceeds to beneficiaries.
A knowledgeable trusts and estates lawyer could assist with the creation or administration of a Naperville irrevocable life insurance trust. An attorney could also help evaluate the situation to determine whether it is advisable to purchase a new policy through a life insurance trust or to transfer an existing policy. Either way, an irrevocable life insurance trust could be a reliable tool for reducing estate tax in Naperville.