You may want to protect and provide for you family in many ways. This desire may have led you to take out a life insurance policy that could help your family financially in the event of your death. These policies are common and do provide assistance after the death of a loved one. However, the proceeds of these policies could potentially face taxation.
In order to further ease burdens on your family, you may want to help them avoid dealing with estate taxes after your death. Fortunately, a variety of methods could help you carry out this action. When it comes to avoiding taxes on life insurance proceeds in particular, you may want to take a closer look at an irrevocable life insurance trust.
The benefits of trusts
An ILIT is only one of numerous types of trusts that could provide many benefits. In some cases, parties may choose to utilize trusts as part of their estate plans in order to avoid probate, avoid causing financial difficulties for special needs loved ones or to achieve any number of other useful outcomes. When it comes to your life insurance policy, you could either place an existing policy into an ILIT or allow the trust to purchase a new policy.
The ILIT will effectively act as the owner of the trust, which means that it is removed from your taxable estate. You may want to keep in mind, however, that because this type of trust is irrevocable, you cannot terminate or change it after its creation.
Additionally, if you transfer an existing insurance policy into an ILIT, protection from taxation starts three years after the transfer. This stipulation means that if you die within three years of the transfer, the policy proceeds could still face taxation. However, this stipulation does not apply if the ILIT purchases a new insurance policy that you simply fund over the years.
Creating an ILIT
Creating an estate plan and choosing the best tools can have its difficulties. If you believe that an irrevocable life insurance trust could suit your needs, you may want to gain more information on this planning option. You may also want to explore other types of trusts and assess other aspects of your life and estate to determine how you could create a comprehensive plan that could help put your family more at ease after your passing.