Irrevocable Life Insurance Trusts

Help preserve your assets by using irrevocable life insurance trusts.

You've devoted a lifetime to creating your wealth and after years of hard work, it's important that your assets be carefully preserved for your family. Perhaps you've prepared a will to oversee the disposition of your estate upon your death. While this is an important first step, you should also begin to consider how estate taxes might affect your financial situation, once it's time for those assets to be passed on.

Despite what you may have heard, the estate tax is still alive and well. During the phase out period from 2002-2009, the top estate tax rate never drops below 45 percent. In 2010, the estate tax is scheduled to be repealed. However, in 2011, the tax is resurrected and - at 55 percent rate - returns as strong as ever. As you can see, it is still vital to develop a strong estate plan to deal with any issues you may come across.

As you build your estate plan, you might find a need for a life insurance policy. A life insurance policy can help ensure that cash will be available to pay estate taxes and other estate expenses such as probate and attorney fees. However, simply purchasing a life insurance policy may not solve the larger problem of estate taxes. If either you or your spouse owns a life insurance policy, it would be included in the value of your estate, most likely increasing the value. This would in turn increase the estate taxes due - which is not the solution you are looking for! This ballooning tax bill can be avoided by having someone other than you or your spouse own the policy.

One solution is to have the policy placed in an irrevocable life insurance trust, or ILIT. The primary purpose of this type of trust is to hold assets (such as a life insurance policy) outside of your estate for federal estate tax purposes. If the insurance policy is owned by you, then it will be subject to estate taxes. But if the policy is owned by the trust and not included in the value of your estate, you will be reducing estate taxes.

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