For those with estate and gift tax issues, irrevocable trusts like Irrevocable Life Insurance Trusts and other estate planning devices like a QTIP Revocable Living Trust are effective for tax mitigation purposes. St. Louis estate tax attorney Vince Taormina can help answer any further questions you may have.
The Federal Estate Tax exemption is currently pegged at $11.58 million, meaning anyone with an estate larger than that amount will be subject to the Federal Estate Tax. And unless Congress acts, by 2026 the Federal Estate Tax exemption will decrease to $5 million. To avoid the Federal Estate Tax, especially if you are over or near the exemption level, it might be a good idea to establish an Irrevocable Life Insurance Trust ("ILIT").
While the proceeds of a life insurance policy are generally not included in a decedent's probate estate, the proceeds are included as part of their gross estate for tax purposes if: (1) the proceeds are payable to the decedent's estate; (2) the decedent owned the life insurance policy on his/her life; or(3) the proceeds can be used to pay back any creditors of the decedent. This means that even if all of the decedent's assets, excluding the life insurance policy, would not be subject to the Federal Estate Tax, when that life insurance policy is paid out and goes over the Estate Tax exemption, then the decedent's entire estate could be subject to taxation. If you have a life insurance policy that could bump you into Estate Tax territory, you should ask The Taormina Firm about establish an Irrevocable Life Insurance Trust.
An ILIT is a trust created to own an insurance policy on the life of the Settlor. The trust may also be named as a beneficiary of the life insurance policy. The main goal of an ILIT is to remove the value of the life insurance proceeds from the Settlor's estate for Estate Tax purposes. When a life insurance policy is owned by a properly funded and administered ILIT, the life insurance proceeds are not included in the Settlor's gross estate for Federal Estate Tax Purposes since the Settlor no longer owns the policy (technically, the ILIT owns the policy).
Once the Settlor dies, the life insurance proceeds are typically transferred to the ILIT and held in further trust to be distributed to the Settlor's beneficiaries, free of transfer tax. The proceeds may also be used to purchase assets from the estate to enable the estate to pay estate taxes without having to liquidate certain assets.
Unlike in a Revocable Living Trust scenario, the Settlor of an ILIT cannot be the Trustee. The Settlor must relinquish all power and control over the life insurance policy in order for the policy to be excluded from the Settlor's gross estate, so it is important to determine who would best be suited to administer the trust. The Trustee will be responsible for paying insurance premiums, choosing appropriate life insurance policies, managing the ILIT assets, properly investing the assets once the policy is paid out, and properly distributing the assets to the ILIT beneficiaries under the terms of the trust.
ILIT's do, however, come with significant disadvantages. For starters, an ILIT must be irrevocable, meaning that the Settlor cannot change the beneficiaries to the trust, or make modifications to the Trust except for under certain circumstances. Moreover, the Settlor will no longer have any control over his/her property, including the rights to change beneficiaries of the policy, access the cash value of the policy, cancel the policy, or pledge the policy for a loan.
Another good way to reduce your estate & gift tax burden is by creating a Revocable Living Trust that contains QTIP provisions. QTIP stands for Qualified Terminable Interest Property and is a special carveout in the rule for qualifying for the unlimited marital deduction. QTIP Trusts can be created jointly or individually. So what does this all mean?
When the first Settlor dies and is survived by his/her spouse, the QTIP Trust will split the assets of each Revocable Living Trust into two separate trusts, one is the Marital Trust (also known as the QTIP Trust) and the other is the Family Trust (a credit shelter trust). The Marital Trust is for the benefit of the surviving spouse for his/her lifetime, and the Family Trust is for the benefit of the Settlor's beneficiaries.
The Marital/QTIP Trust allows the first spouse to die to take advantage of the unlimited marital estate tax deduction while still controlling where the assets go when the surviving spouse dies. The Marital/QTIP Trust becomes irrevocable (meaning the terms of the Trust cannot be changed) at the time of the Settlor's death, which is advantageous to the Settlor in case his/her spouse remarries.
Likewise, the Family Trust is irrevocable upon the Settlor's death, and provides for the health, education, support, and maintenance of the Settlor's descendants. As with a traditional Revocable Living Trust which staggers distribution of assets, the Family Trust can be set up to where the Settlor's children do not receive trust assets until they reach a certain age. The Family Trust also serves as a credit shelter trust, meaning that the creditors of the Settlor's descendants cannot reach the property held in trust for the descendants until a distribution is made.
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