At Nodelman Law, we have drafted numerous Irrevocable Life Insurance Trusts as part of our clients’ estate plans.
There is a common misconception that life insurance is not taxable. Unfortunately, the proceeds from life insurance policies are included in the gross estate for the calculation of estate taxes. Thus, an individual’s gross estate will include the life insurance policy proceeds, along with all other assets owned. If an individual’s estate exceeds the state and/or federal exemption, a significant tax may result.
One way to avoid the policy proceeds from being included in the estate is to create an Irrevocable Life Insurance Trust (“ILIT”). The ILIT will be both the owner and beneficiary of the policy. The grantor (or insured) will not have any incidence of control over the policies (the Trustee maintains control) and thus, at the death of the insured, the policy proceeds are paid to the Trust (and distributed in accordance with the terms of the trust) and not taxed.
The insured must survive a 3-year term from the date of transfer of the life insurance into the ILIT. The “3-year lookback” rule states that if the grantor dies within 3 years from the date of transfer, the entire amount is included in the grantor’s taxable estate. A way to avoid the 3-year lookback rule is to have the Trustee purchase the life insurance on behalf of the insured. This way, the insured never maintains any incidence of control over the life insurance.
- Avoid estate taxes on policy proceeds
- Insured must relinquish all control over the policy and leave the control in the hands of the Trustee
- 3-year lookback rule
Contact Nodelman Law, a New Jersey and New York estate planning firm, at 212-710-2789 ext. 2753 for a free initial consultation to determine whether an ILIT should be included in your estate plan.