Tag: financial-planning

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.

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Qualified Charitable Distributions

IRS NEWS 12/21/2023

Individuals age 70 ½ or older may be able to exclude a qualified charitable distribution (QCD) of up to $100,000 from their income each year. A QCD is a taxable distribution paid directly from an IRA (other than an ongoing SEP or SIMPLE IRA) to a qualified charity. It cannot be paid to you as the IRA owner.

You must be at least age 70½ when the QCD distribution to the charity is made. The SECURE 2.0 Act of 2022 did not change the 70½ age to be eligible to make a QCD.

A QCD may also count toward your required minimum distribution for the year.

A QCD does not affect your income and is tax-free if paid directly from the IRA to an eligible charitable organization, and is available regardless of whether you itemize deductions on Schedule A. If you took a distribution from your IRA and then made a charitable donation, the distribution would be taxable as ordinary income and the donation would only be deductible as an itemized deduction on Schedule A. Itemized deductions for most taxpayers don’t exceed the available standard deduction. And the increased income could affect eligibility for certain available tax credits.

The financial institution reports the QCD to you on Form 1099-R. You report the QCD on Line 4a of the Form 1040 along with any other IRA distributions. Show the amount of the QCD as zero taxable on Line 4b and write “QCD” next to the Line 4b entry. Review Publication 590-B, Distributions from Individual Retirement Arrangements for more information.

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