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Irrevocable Life Insurance Trusts

Irrevocable Life Insurance Trusts (ILITS) are a very common and acceptable planning technique used to own life insurance policies. Schedule D of a 706 (death tax return) is life insurance on the decedents life, if you own your policy and a spouse or a family member is the beneficiary, then the death benefit is includable in your estate for Federal Estate Tax calculations. If the total of your estate plus the insurance death benefit does not exceed the total applicable exclusion amounts, then generally there is no issue. However, if the sum of these two factors exceeds the total applicable exclusion amounts, then the insurance death benefit can actually trigger an estate tax.

An ILIT created by the client’s legal counsel, when properly executed in concert with any life insurance, can effectively remove that death benefit from all calculations. The ILIT has a trustee who is the technical owner of the policy versus the insured. The death benefit is then paid to the trust and distributed according to the terms of the trust.  Thus, it ensures the proceeds will be delivered to the family tax free.

The overall need to look at a client’s entire picture, to understand all of the individual parts, and then combine them versus just working on one piece makes TailorMade Financial effective.