Many clients have life insurance as part of their assets to provide for their surviving spouse or children. Although life insurance is not subject to income tax, it is subject to estate tax. The estate tax is a transfer tax on everything you own on your date of death – this includes life insurance, retirement plans, real property and your personal property. If you have significant life insurance policies (a policy or multiple policies that exceed $500,000), then you may want to consider an irrevocable life insurance trust (ILIT) for your life insurance. An ILIT is a special type of trust that is used to own life insurance. The purpose of the ILIT is to remove the life insurance from your estate so that it is not subject to estate taxes. For married couples, one spouse creates an ILIT and transfers ownership of his or her existing policy(ies) to the ILIT. The other spouse may serve as the trustee of the ILIT. Upon the death of the insured the proceeds from the life insurance policy are held in the ILIT for the benefit of the surviving spouse. Upon the death of the surviving spouse, the remaining assets can be held in trust for their children. The life insurance is not included in the surviving spouse’s estate either, so it will ultimately pass to the children without any estate taxes. Feel free to give me a call to see if an ILIT would be appropriate for your family.
Thanks for setting up our trust, Michelle-Shari! It is comforting to know that our son will be set up if something happens to both of us.