There is a widespread misconception that life insurance funds are exempt from estate tax. While the funds received by your loved ones are not subject to income taxes, they are considered part of your taxable estate. As a consequence, your loved ones may lose over forty percent of the funds’ value to federal estate taxes. An Irrevocable Life Insurance Trust ensures that the death benefits from your life insurance policy remain separate from your estate, thereby exempting them from estate taxes. There are numerous possibilities for structuring an ILIT. For instance, ILITs can be designed to provide income to a surviving spouse while the remainder is allocated to your children from a previous marriage. Another option is to distribute a limited portion of the insurance funds gradually over time to a financially irresponsible child.
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