What if I don’t own my insurance but control it through some one else?
Even if you do not own your life insurance in your name, the IRS may determine you to be the owner and therefore liable for federal estate taxes on the policy proceeds. Your life insurance will be included in your taxable estate as long as you possess any incidents of ownership for federal estate tax purposes. Incidents of ownership include your rights to borrow on a policy or pledge as collateral, name or change the beneficiary, and assign the policy to someone else.
If you maintain any right to a life insurance policy, the IRS will take the position that you retained incidents of ownership and will include the proceeds in your taxable estate. With a properly structured ILIT, you no longer retain any incidents of ownership under the IRS definitions and will not be liable for federal estate taxes.
What is the theory behind an ILIT?
This is the opposite of a “revocable trust”, which allows the grantor to modify the trust. While the tax rules will vary between jurisdictions, in most cases, the grantor can’t receive these benefits if he or she is the trustee of the trust. This fact often leads to the consideration of employing a corporate trustee to serve as the fiduciary administrator over the trust assets.
Thus the proceeds of those policies will not be taxed upon your death nor will they be taxed upon the death of your spouse if he or she survives you. They completely avoid the federal estate tax.
- Who the trustees will be while you are alive, upon your disability, and upon your death.
- How the proceeds will be distributed to your beneficiaries or left in trust