A Strategy to Protect Your Assets
When planning for the future, ensuring your loved ones are taken care of is paramount. One aspect of estate planning that often goes overlooked is the impact of life insurance policies on estate taxes. Many individuals are unaware that the value of a life insurance policy can be included in their estate upon their death, potentially subjecting their estate to hefty estate taxes. However, there is a solution to this dilemma: the irrevocable life insurance trust (ILIT).
What is an ILIT?
An ILIT, short for irrevocable life insurance trust, is a specialized trust designed to hold life insurance policies. By placing the policy within the ILIT, it is no longer considered part of the insured individual’s estate. Instead, the ILIT becomes the owner of the policy. This strategic move can have significant benefits in terms of estate tax planning.
Why Use an ILIT?
The primary reason to utilize an ILIT is to avoid the inclusion of the life insurance proceeds in the insured individual’s estate. Without proper planning, the value of the policy can push the estate over the applicable exemption threshold, resulting in estate taxes that could have been avoided. By establishing an ILIT, the policy is effectively removed from the estate, safeguarding it from taxation.
Understanding Estate Tax Exemptions
Estate tax exemptions play a crucial role in determining the potential tax liability of an estate. In 2024, the exemption for an individual is nearly $13 million. Additionally, if a spouse files Form 706 with the IRS after the death of the first spouse, the exemptions can be combined, yielding nearly $24 million in total exemption.
However, it’s essential to note that these exemptions are subject to change. In 2026, the exemptions are scheduled to be reduced, with estimates suggesting a decrease to around $7 million for an individual and $14 million for a couple, assuming Form 706 is filed.
The Role of ILITs for Estate Planning
For individuals with substantial assets, especially those with life insurance policies, incorporating an ILIT into their estate plan can be a prudent decision. Not only does it provide a means to avoid unnecessary estate taxes, but it also ensures that the intended beneficiaries receive the full benefits of the life insurance policy without interference from taxation.
Conclusion
In the realm of estate planning, every detail matters. Life insurance policies, while essential for protecting loved ones, can inadvertently lead to significant estate tax liabilities if not properly managed. By establishing an ILIT, individuals can take proactive steps to safeguard their assets and ensure a smooth transfer of wealth to future generations. As estate tax laws continue to evolve, staying informed and seeking professional guidance is key to developing a comprehensive estate plan that meets your unique needs and goals.
Remember, planning today can provide peace of mind and security for tomorrow.