Many Arizonans — even those who don’t yet have an estate plan — have a life insurance policy to help provide financially for their family after they’re gone. These policies may be worth millions of dollars.
Did you know that the value of your life insurance policy is included in the overall value of your estate? That means that your loved ones could end up paying federal estate taxes as the result of your life insurance policy.
In 2018, the amount of an estate valued at over $11.8 million is subject to estate taxes. Therefore, if you have $10 million in assets and a $2 million life insurance policy, your total estate is valued at $12 million, and the Internal Revenue Service (IRS) can take a piece of that.
There’s a way to help them avoid that and keep more of the money you intended to go to them and other beneficiaries. It’s called an irrevocable life insurance trust (ILIT). An ILIT works somewhat like a living trust, except that it’s set up solely to hold your life insurance policy. You can place your current policy in an ILIT. If you don’t have one, you can purchase one in the trust’s name.
Generally, the ILIT is named the primary beneficiary of the policy. Then family members and other designated beneficiaries are named in the trust to receive the proceeds from the ILIT.
There are a couple of important things you need to know when establishing an ILIT. First, it needs to be an irrevocable trust. That means you can’t make any changes to it. Second, you can’t be the trustee. You need to appoint one. These characteristics of an ILIT protect it from being considered an asset of the estate potentially subject to federal estate taxes.
If you think an ILIT would benefit your estate planning goals and your loved ones, discuss it with an experienced Arizona estate planning attorney. They can help you determine whether it’s right for you and help you set it up and maintain it properly.