Life insurance planning
In its most traditional form, life insurance is used to protect a family from the financial effects of a premature death. However, life insurance can also be used as an estate planning tool in a myriad of instances - to provide equitable distribution of estate, to reduce or eliminate gift and estate tax consequences, and to solve liquidity needs in the context of a buy-sell agreement or for estate taxes. In addition, life insurance continues to be an effective tool when combined with other estate planning options to provide a "hedge"-namely-to provide cash which will cover tax ramifications in the event the individual dies prior to the transfer being effectuated.
Regardless of the type of life insurance (term, whole, universal, or a hybrid), it is important to note that life insurance policies owned by an individual at death are included in his or her gross estate. When an insurance policy is owned in the insured's name individually, or through the insured's living trust, the insured can revise the terms of the life insurance, beneficiaries, etc.In this way, the insured is recognized as having "incidences of ownership" and the full value of the proceeds from the life insurance policy are included in the insured's gross estate upon death.
An ILIT is an irrevocable trust created for the principal purpose of owning a life insurance policy (or policies).When properly structured and maintained, the death benefits paid to the trust will be excluded from the insured's gross estate. Thus, it is important to consult with an attorney who concentrates in estate planning to determine whether an ILIT is an appropriate tool to incorporate into one's estate plan to ensure life insurance proceeds pass in the most tax efficient manner.