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Estate taxes exist at two levels: there is a federal estate tax and a state tax. It is the responsibility of the personal representative to pay estate taxes. If you are looking for estate tax savings, an irrevocable life insurance trust lawyer may be able to help you.
In this article, you will learn more about estate taxes, irrevocable life insurance trusts, and how an irrevocable life insurance trust lawyer may be able to help you with estate tax exemptions. If you have questions about irrevocable life insurance trusts, estate taxes, estate planning, or elder law, schedule a free consultation with Ball Morse Lowe.
Oklahoma Does Not Collect an Estate Tax
Oklahoma does not collect estate taxes, unlike some other states. However, depending on the size of your estate, you may be required to pay estate taxes at the federal level. In 2013, the U.S. Congress approved a permanent estate tax exemption that adjusts each year with inflation. Today, the exemption threshold is at $11.58 million for 2020 and $11.7 million for 2021 according to the IRS, meaning people with assets totaling less than that can avoid the 40 percent tax rate.
How an Irrevocable Life Insurance Trust Lawyer May Help You Avoid Estate Taxes
Someone’s wealth may be worth more than $11.58 million for 2020 and $11.7 million for 2021, but using estate planning tools can help position assets to be excluded from the taxable sum. An irrevocable life insurance trust lawyer can help you establish an irrevocable life insurance trust to care for your spouse or children after your death.
Forbes magazine notes that creating an irrevocable life insurance trust will enable the trust to own an insurance policy, thus keeping it out of the total value of the estate. Irrevocable life insurance trusts (ILIT) are funded by life insurance proceeds. The life insurance policy can be previously existing when it is transferred into the ILIT. An irrevocable life insurance trust can be formed during your life (although it is still an irrevocable trust) or it can be created upon your death as part of the estate plan.
Because it is an irrevocable trust, you will not be able to act as the trustee if you create it during your life. Otherwise, you have "incidents of ownership" which would keep you in control of your policy. Instead, you can appoint another person you trust, such as your spouse or children (if your children are adults) to be the trustee. You can also appoint a bank or your irrevocable life insurance trust lawyer as your trustee.
The avoidance of incidents of ownership assists in avoiding or minimizing the federal estate tax. Once it is funded, you will not be able to make amendments, modifications, or terminate the trust.
The American Bar Association points out that in addition to tax savings, there are several other benefits to using an irrevocable life insurance trust, such as the following:
- It enables professionals to manage the asset. While you can appoint your spouse or children as trustees, you also have the ability to appoint a professional. This could take the stress of managing the life insurance proceeds off of the surviving spouse when you die.
- It provides the person creating the trust with some flexibility, as he or she will still have some minor controls. For example, if you really want to cancel the ILIT, stop paying the premiums on the life insurance policy. However, before you take that step, you should talk with your irrevocable life insurance trust lawyer to discuss how losing those death benefits might affect your entire estate administration, surviving spouse if you're married, and your taxable estate. It could significantly impact your estate tax savings unless you revisit your estate plan to determine if you should make other decisions for at least part of the estate.
- It gives the asset protection from any creditors going after the beneficiary. This is a wonderful benefit for this part of the estate in addition to estate tax savings.
Remember, while the person who sets up the trust will be able to make sure the premiums are paid, he or she must relinquish ownership and therefore will not be able to change the beneficiary, convert the policy, or use the policy to borrow money.
Anyone taking this course of action should also be aware of the three-year look-back rule. This states that if the person who transferred the policy into the trust dies within three years of doing so, then the proceeds from the policy will be added to the value of that person’s estate. Therefore, federal estate taxes could still apply to those using an irrevocable life insurance trust.
Do I need a Trust or Will?
Free Consultation with an Irrevocable Life Insurance Trust Lawyer
If you are interested in learning more about establishing an irrevocable life insurance trust or estate tax savings, or other estate related topics such as a living trust, gift tax, and income tax for estates, schedule a free consultation with the irrevocable life insurance trust lawyers of Ball Morse Lowe now.
