If you are single and the value of your net estate, which includes life insurance policies, is more than the federal estate tax exemption ($5.34 million for 2014) or if you are married and the value of the net estate is greater than the two combined exemptions ($10.68 million for 2014), an irrevocable life insurance trust may be right for you.
With taxation being an ever changing thing, if you fall just below those exemptions, an irrevocable life insurance trust may still be right for you, given that for a portion of 2013, the legal exemption was $1 million for an individual and $2 million for a married couple.
Although the benefit paid out under a life insurance policy is typically free from income taxes, life insurance proceeds for which you have any “incidents of ownership,” in other words, policies you can borrow against, assign, or cancel, or name or change the beneficiary) are included in your estate when you pass away, and count against the estate tax exemption.
An irrevocable life insurance trust helps to address this concern by having the trust own the policy, rather that you as an individual. As a result, your estate will pay less in estate taxes and more money will go toward the loved ones you leave behind.
While some may be tempted to simply have someone else own the policy, there are a number of pitfalls, including the potential that the other person could change the beneficiary or take out the cash value for the own benefit. Using an irrevocable life insurance trust guards against that threat, by having a trustee in charge of the trust. You select the trustee, and the trustee must follow the instructions of the trust.
These trusts can be complex, and so it is important that you consult an attorney to create the trust.
To get more information or to schedule an appointment, call (330) 244-4200 to set up an appointment.