What are Death Taxes? For the purpose of federal tax, the is something called federal estate tax exclusion and it is adjusted, or indexed, for inflation. In 2016 the federal estate tax exclusion is $5.45 million dollars for an individual, and $10.9 million dollars for a couple. That means that an individual dying in 2016 with an estate valued at less than $5,450,000 dollars will not owe any federal estate tax.
So how do we determine what is includable in the decedents estate for federal estate tax? Let’s leave that for another discussion. Suffice it to say that generally life insurance IS includible in the insured’s estate for death tax purposes. Even an Irrevocable Life Insurance Trust (ILIT) may be included in the insured’s estate. An ILIT is used expressly TO keep the proceeds out of the insured’s estate, so what gives? Well, if the Irrevocable Trust is poorly drafted or managed, the proceeds may be included. Also, if the insured gratuitously transfers all the rights in the policy within three years of his or her death, the Internal Revenue Service code section 2035(a) makes the proceeds includible in the decedent’s estate for federal estate tax purposes. The reason is the way the IRS sees it is that the gift was made “in contemplation of death”, and therefore is disallowed.
The purpose of an Irrevocable Life Insurance Trust is to keep the proceeds out of the insured’s estate for federal estate tax. This is achievable if the above criterion is met (policy not transferred within three years of the insured death), and certain other criteria is also met. One of these is that the insured must not require that the beneficiary use the proceeds to pay obligations of the estate such as taxes. Another is that the insured must not possess “incidents of ownership”.
Incidents of ownership means the power of the insured or his or her estate to control the proceeds of the policy, the power to change beneficiaries, to assign the policy, to borrow or loan from the policy, and others.
So, as you can see there are many restrictions and requirements in how the Trust is drafted, and how it is maintained in order for this ILIT Irrevocable Trust to function as intended. Consult an attorney like me for your Estate Planning needs to help insure a proper outcome.
Please see my Blog for continued discussion of various aspects of ILIT Trusts.
Please feel free to give me a call and we can establish your Living Revocable Trust, ILIT, or other Estate Planning goals today. If you have specific estate planning objectives, I can help create solutions to achieve your specific purpose.
See lots of estate planning information on my website at: www.myestate-plan.com
Thanks for reading my blog.
William Daniel Powell
This document is for informational purposes only. Nothing in this is to be considered legal advice. Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship. If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction. I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information.
Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.