An irrevocable life insurance trust can be a very useful tax efficiency tool for people who have valuable life insurance policies.
If you simply make someone the beneficiary of a policy that you own as an individual he or she will receive the proceeds free of income tax. However, these proceeds will be considered to be a part of your estate for estate tax purposes.
Given the fact that the maximum rate of the estate tax is 35% this year and 55% in 2013 you certainly want to do whatever it takes to reduce your liability. To that end you could place your policies into an irrevocable life insurance trust. They then become the property of the trust and you have no incidents of ownership. Therefore, the proceeds would not be considered to be part of your taxable estate.
That is, if you live for three years after placing your policies into the trust. This three-year waiting period can be avoided if you establish the ILIT and have the trust purchase the insurance policies.
It is true that the estate tax is not imposed on transfers between spouses. But if you are thinking that you could make your spouse the beneficiary of policies that you own you have to consider the fact that he or she would be in possession of the proceeds. They would become part of his or her estate and as a result they would be quite taxable.
Without question, you have to be aware of the tax man when you are making preparations for the future. The best way to proceed when the estate tax is an issue is to engage the assistance of a seasoned, savvy South Carolina estate planning lawyer.