Irrevocable Life Trusts May Offer More Than Tax Advantages

Ensuring your life is considered a sure-fire means of covering final expenses and leaving something for your family. What if we told you there's a better way to invest those premiums that will reduce their financial liabilities? Irrevocable life insurance trusts (ILITs) are an over-overlooked and misunderstood financial planning tool you should check into.

What is an Irrevocable Life Insurance Trust?

Financial planners try to help you find ways to invest money that reduces your tax obligations while growing your bank account. That may serve you now, but doing well may penalize your heirs after you're gone. An ILIT is an insurance investment that allows you to accumulate substantial amounts of money and will it to beneficiaries while avoiding the estate tax.

What is the Estate Tax?

Currently, the federal government and several states impose an inheritance tax on estates with a high net worth; the exclusion amount is rising steadily. This tax is assessed at the fair market value of your assets and charged to your heirs. Things like cars and property can fluctuate in value. Cash is cash, and that's what most insurance payouts give your family.

How Do ILITs Work?

The estate tax is imposed on your children. It's either due upon your death or deferred until the death of your spouse, who is entitled to unlimited marital deductions to avoid or reduce their tax burden. With an ILIT, the insurance policy proceeds aren't the sole property of heirs; they're instead placed into an irrevocable trust and invested on their behalf. The policy is jointly owned by the purchaser and the beneficiaries, allowing it to avoid taxation after the purchaser's death. This is a huge financial advantage if the total net worth of the estate is above the exclusion.

That frees your children to gain the full value of the policy, which they can use to reduce the balance of the estate tax on other assets or just enjoy. The main downside is that the trust is irreversible. Even if a life circumstance changes, the trust cannot be altered.

No one likes to think about the inevitable, but it's better to plan now rather than worry later. When you're looking for any type of life or health insurance, choose a reputable agency that offers a wide range of options and providers. Contact us at The Della Porta Group with any questions.