Popular Again: Using Life Insurance Trusts to Protect Against Estate Taxes | Rivkin Radler LLP
Lloyd Harbor Life – January 2022
With the prospect of lower estate tax exemptions and higher inheritance tax rates, now is a good time to consider using life insurance as cover against any inheritance tax. One way to do this is to add an irrevocable life insurance trust (ILIT) to your estate plan.
Life insurance proceeds are included in the deceased’s estate for estate tax purposes (assuming the deceased owned the policy). If the proceeds are payable to a spouse or charity, a deduction equal to the proceeds is permitted, so that no estate tax will be payable on the proceeds. However, if the proceeds are payable to someone else, they will be subject to estate tax if the assets of the estate, including the proceeds, exceed the estate tax exemption amounts. . While estate tax exemption amounts are currently high – the federal exemption for 2022 is $12.06 million and the New York State exemption is $6.02 million. dollars, there is a strong possibility that exemption amounts will be reduced and tax rates increased.
An easy way to keep life insurance proceeds out of your estate is to have an ILIT policy owner. You create the ILIT; ILIT beneficiaries and conditions, in general, can be whoever and whatever you want. The trust is irrevocable. If the financing of the ILIT is done correctly and that certain administrative provisions are respected, the proceeds of the life insurance will not be taxable on your death.
Life insurance is purchased for many reasons, including to protect loved ones, to pay inheritance taxes, and to equalize bequests to children (for example, a child gets the $5 million business and the another receives $5 million in life insurance proceeds). If you’re single, have a $5 million business, and $5 million in life insurance that you own individually, your estate tax bill is calculated on $10 million, subjecting your estate to tax. New York estate tax in 2021 on $4.07 million (resulting in over $1 million in New York estate taxes). If the life insurance had been held in an ILIT, your New York tax bill would have been calculated at $5 million, resulting in a $0 New York estate tax in 2021, allowing your heirs to save more than a million dollars. If inheritance tax exemptions are decreasing, the use of an ILIT is even more compelling.
ILITs have technical rules that your estate planning lawyer can explain to you. Using an ILIT is a simple way to protect your family and reduce your tax burden during these uncertain times.
This article first appeared in the January 2022 issue of Lloyd Harbor life.