Intro: Removing Life Insurance Proceeds From Your Taxable Estate
Under the Bush tax cuts as extended by Obama, no federal estate tax is assessed upon the first $5.12 million of an individual’s taxable estate. On January 1, 2013, federal estate tax exemption amounts will drop to $1 million per person. As such, it is about to be much easier for a person’s assets to exceed $1 million once life insurance is included. While many of us in estate planning and financial planning world expect that the federal estate tax threshold will soon be raised to $3.5 million per person, there is still a window of time in which anything after the first $1 million will of an estate will be taxed at 55%.
Let me repeat that: While the federal estate tax exemption was set at $5,000,000 and the estate tax rate was set at 35% for the 2010 and 2011 tax years, and the exemption increased to $5,120,000 for 2012, on January 1, 2013 the exemption and rate are scheduled to revert back to the numbers that were in effect in 2001/2002 – meaning a $1,000,000 estate tax exemption and 55% estate tax rate.
Without proper planning, this could mean a big tax bill before insurance proceeds could be used for the needs of your spouse or partner, children, and other beneficiaries.
Who Are the Beneficiaries of an ILIT?
The ILIT will also be designated as the primary beneficiary of your life insurance policies. Thus, after you die, the insurance proceeds will be deposited into the ILIT and held in trust for the benefit of your spouse during his or her remaining lifetime, and then the balance will pass to your children or other beneficiaries. Aside from this, the ILIT can provide your family with a quick source of cash to pay your estate tax bill while at the same time not increase your overall estate tax burden.
Another benefit of the ILIT is that since the insurance proceeds will be held in trust for the benefit of your spouse instead of going directly to your spouse, the proceeds can’t be taxed in your spouse’s estate either. If desired, you can take the ILIT one step further and set it up as a Dynasty Trust or Generation Skipping Trust for the benefit of your children and future generations.
The DeKalb County Probate Court can be confusing without the assistance of an experienced attorney, take advantage of a free consultation with a probate attorney in Atlanta who has vast experience with the Court.