How to Avoid Taxes on Life and Disability Insurance (Smart Money Magazine)

The above article from Smart Money magazine is a simple and concise synopsis of why some individuals and families with taxable estates or large life insurance policies may want to consider establishing Irrevocable Life Insurance Trusts (“ILITs”).irrevocable life insurance trusts

While life insurance proceeds are generally free from income tax, they remain subject to the federal estate tax (currently at 35% rate, but possibly rising to a rate as high as 55% if the 2010 Estate Tax law is not renewed).

Accordingly, many of my higher-net worth clients choose to establish ILITs, by which I assist them in setting up an ILIT to own the life insurance policy. The annual premiums are typically paid with annual exclusion gifts (currently up to $13,000) and the beneficiaries of the ILIT receive the proceeds from the policy.

There are a number of pitfalls associated with ILITs, including the “three-year rule,” the importance of “Crummey” notices and rules for benefiting spouses. Feel free to contact me if you are curious whether establishing an ILIT might make sense for your family.

-Curtis