Shielding Life Insurance Proceeds From Estate Taxation
Insurance agents often claim that life insurance proceeds pass to beneficiaries "tax free." While this is true with respect to income taxation, it is not necessarily true with respect to estate taxation. Avoiding this potential estate tax liability is the main reason why many policyholders choose to vest ownership of their policies in irrevocable life insurance trusts (ILITs).
At Spencer Law Firm LLC, our attorneys frequently assist clients with the creation of ILITs and other estate planning trusts. We can help you determine whether you would benefit from an ILIT, and if so, we can guide you through the process of establishing and funding the trust.
Understanding How ILITs Work And When They Are Needed
There are two scenarios in which the entire death benefit from a life insurance policy may be included in the estate of the deceased for estate tax purposes. One is when the estate of the insured is the beneficiary of the policy — something that is rare and easily avoided. The other is when the insured was also the owner of the policy at the time of his or her death. This is much more common, because in most cases, people buy life insurance on their own lives.
An irrevocable life insurance trust is an opportunity to relinquish legal ownership of your life insurance policy while ensuring that it is maintained in accordance with your wishes.
Any transfer of ownership of an existing life insurance policy from the insured to a trust is subject to the IRS's "three-year rule," meaning that the policy is not removed from the insured's taxable estate until three years have passed. An ILIT that is created prior to the purchase of life insurance and that actually purchases the policy is not subject to this rule.
To discuss whether you will benefit from placing your life insurance in an irrevocable life insurance trust, please contact us at 717.207.7935 or by email to schedule a meeting. Based in Lancaster, our team of estate planning lawyers serves clients throughout Pennsylvania.