Moving Money out of Your Estate with an ILIT

The estate tax, referred to many as the death tax, can be a burden for those who reach a certain net worth. While many see it as a good problem to have, others just find it cumbersome to deal with. Fortunately there are some estate planning tactics that you can use to minimize the impact that estate taxes will have on your legacy. Your accountant in Billings, Montana explains how an irrevocable Life Insurance Trust, or an ILIT, helps.

What is an ILIT?

Essentially the ILIT works to remove money from your estate in order to reduce its overall value. Because the ILIT would own the life insurance (almost always a second-to-die policy) on you and your spouse, the value of that insurance will no longer be included in your estate (or taxable when both of you should pass). Here is how that looks:

You and your spouse have a net worth of $10 million, $2 million is an insurance policy. There is a $5.43 million exemption for 2015, so anything over that amount is taxed at a rate of 40%. What this means is that if you and your spouse both died in 2015, your estate would have to come up with $1,828,000 within 9 months.

However, if you had the ILIT own that $2 million insurance policy, your estate would be considerably smaller. If you both died in 2015, your estate would be valued at just $8 million and the taxes due would total $1,028,000. Keeping your life insurance in an ILIT saves you $800,000.

Who Pays for the ILIT?

There are ways to even get around the taxes that pay the premiums on your insurance. Since the ILIT does not have an income or cash of its own, you have to pay the insurance premiums. Because you are giving away the insurance premiums, they are subject to gift taxes.

In 2015 you can give up to $14,000 to any individual or entity, and claim that on your gift tax exemption. If your insurance premiums are higher than that amount, you can set it up where you pay up to $14,000 and your spouse pays up to $14,000 as well. If you still need a higher exemption, you can dip into your $5 million lifetime exemption.

Estate taxes are one of those problems that many people would love to have. It means that you are successful, you have worked hard, and you planned well throughout your life. But without making sure that you have a plan to take care of those estate taxes, your heirs may be in trouble.

Practical Taxes is a full service accounting firm in Billings, Montana. We can help you determine your estate taxes, reduce your annual gift taxes, and conduct other strategic tax consultations. Call us at 406-894-2050 to learn more.