Understanding Irrevocable Life Insurance Trusts

Way to save taxes for your heirs.

Irrevocable Life Insurance Trusts (ILITs) are a valuable estate planning tool that can help individuals in New York and other states minimize their estate tax liability. By transferring ownership of a life insurance policy to an ILIT, the death benefit can be received by beneficiaries outside of the insured’s estate, potentially avoiding significant estate taxes.

Key Benefits of ILITs in New York:

Estate Tax Reduction: ILITs can significantly reduce the size of your taxable estate, potentially saving your beneficiaries substantial amounts of money in estate taxes.
Flexibility: ILITs can be customized to meet your specific needs and goals, allowing you to control how the death benefit is distributed and used.
Asset Protection: ILITs can also provide asset protection by keeping the death benefit outside of your estate, shielding it from potential creditors or lawsuits.
Considerations for New York Residents:

New York Estate Tax: While New York has a relatively high estate tax rate, the state also offers a lifetime exemption. By effectively utilizing an ILIT, you can transfer assets out of your taxable estate and potentially avoid New York estate taxes.
Three-Year Clawback Rule: New York has a three-year clawback rule, which means any gifts made within three years of death may be included in the deceased person’s estate. It’s essential to consider this rule when planning your ILIT strategy.
How to Establish an ILIT:

Consult with a Professional: An estate planning attorney can help you create an ILIT that is tailored to your specific needs and goals.
Transfer Ownership: You will need to transfer ownership of the life insurance policy to the ILIT. This is considered a gift and may have gift tax implications.
Name Beneficiaries: Designate the beneficiaries who will receive the death benefit.
Consider Funding: You may need to fund the ILIT with cash or other assets to ensure that the death benefit can be paid out.
Conclusion:

ILITs can be a powerful estate planning tool for New York residents. By understanding the benefits and considerations involved, you can make informed decisions to protect your assets and minimize your estate tax liability. Consulting with an estate planning attorney is essential to ensure that your ILIT is properly structured and meets your specific needs.