Irrevocable Life Insurance Trusts may alleviate heavy tax burdens on your estate. Are you aware your life insurance policy may bring a heavy tax burden along with it? Many individuals and families are unaware of how their life insurance policies may affect their estate plans, especially those with significant wealth. But fear not, there’s a solution that might just alleviate this stress: Irrevocable Life Insurance Trusts (ILITs) and Crummey Letters.

Let’s break it down into simpler terms.

What’s an Irrevocable Life Insurance Trust (ILIT)?

An Irrevocable Life Insurance Trust (ILIT) is a tool used in estate planning specifically designed to own life insurance policies. By placing your life insurance policy within an ILIT, its value isn’t counted as part of your estate when you pass away. This can be a game-changer for those worried about estate taxes.

Two key points to remember:

  1. It’s Irrevocable: Once you set up the ILIT and transfer your policy into it, you lose control over it. Similar to an Irrevocable Trust. This ensures the policy stays out of your estate.
  2. You Can’t Be the Trustee: You can’t manage the trust yourself if you want it to work effectively. But don’t worry, a spouse or adult child can step in as trustee.

Who Benefits from the Trust?

You’ll typically name the ILIT as the primary beneficiary of the life insurance policy. After you pass away, the proceeds from the policy go into the trust for the benefit of its beneficiaries.

ILITs and Crummey Letters: Simplified

Now, let’s talk about Crummey Letters, which might sound complicated but are essential for making ILITs work smoothly.

Every month or year, you need to pay premiums for your life insurance policy. Since the ILIT owns the policy, it’s responsible for these payments. But when you contribute funds to cover these premiums, the beneficiaries of the trust are technically receiving a “gift.”

To ensure this gift qualifies as tax-free and falls within the $15,000 gift tax exclusion, beneficiaries must have a “present interest” in it. This is where the Crummey Letter comes in.

What’s a Crummey Letter?

It’s a letter sent to the beneficiaries of the ILIT, informing them that a gift has been made to the trust. It gives them the immediate right to withdraw these assets within a certain time frame, usually around 30 days. If they don’t withdraw, the contribution is used to pay the policy premium.

This letter essentially turns what would be a future gift into a present one, making it eligible for the gift tax exclusion.

Final Thoughts

While beneficiaries technically can withdraw the funds, it’s in everyone’s best interest for them not to. Otherwise, it could jeopardize the policy’s premiums, leading to lapses.

And remember, beneficiaries must be informed of this right each time a contribution is made to the ILIT to qualify for the gift tax exclusion.

If all of this still seems overwhelming, don’t worry. We are here to help navigate the estate planning journey through each chapter of your life. Reach out to us, and let’s work together to secure your future.

 

The post Irrevocable Life Insurance Trusts Make Your Estate Tax Efficient appeared first on Lexern Law Group.

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Mr. Feldman believes that communication is the key to any successful relationship with his clients. Encouraging open communication and being easily available to answer clients’ questions has allowed him to build long-term partnerships and trust with his clients. Importantly, Mr. Feldman spends significant…

Mr. Feldman believes that communication is the key to any successful relationship with his clients. Encouraging open communication and being easily available to answer clients’ questions has allowed him to build long-term partnerships and trust with his clients. Importantly, Mr. Feldman spends significant time and effort educating his clients on estate planning options and various business opportunities and associated risks, encouraging them to take a proactive approach to their future and the preservation of their legacies.

Mr. Feldman has been providing professional services to sophisticated clients at some of the largest accounting and law firms and through Lexern Law Group, which he founded in 2010. Mr. Feldman and his wife, Irina, have been married for over seventeen years and have four children. In his free time, Mr. Feldman enjoys traveling, practicing martial arts, and riding his motorcycle.