Thursday, July 30, 2009



The Federal Government through the tax code levies an "Estate Tax" on estates which exceed a certain amount, known as the "exemption amount" or the "unified credit".

In 2009, the exemption amount is $3.5 Million, however, there is a likelihood of a tax code change in the near future. No one really knows when that will occur and what it may be, however, I believe the exemption amount will be cut back.

One of the techniques to deal with payment of the estate tax is the use of a Irrevocable Life Insurance Trust".

Because the U.S. tax code does not tax life insurance proceeds as income, the proceeds of the life insurance policy can be used to pay the estate tax.

To keep the life insurance proceeds from also be counted as part of the estate (and therefore driving up the value of the estate), the decedent must not hold any "incidents of ownership", i.e., the decedent cannot be the owner of the policy.

A trust can be the owner of the policy, but it must be IRREVOCABLE because the IRS considers the ability of the grantor to revoke or amend the trust as an incident of ownership.

Thus, an Irrevocable Life Insurance Trust" can be established to own the life insurance policy, keep the proceeds out of the estate, and provide liquidity for payment of estate taxes separate from the estate itself.

An Irrevocable Life Insurance Trust" is best used in circumstances where the size of the estate will exceed the exemption amount, and the estate does not consist of enough liquidity to cover the estate tax, which must be paid within six (6) months of death.

The use of an Irrevocable Life Insurance Trust is not for everyone, and you should seek counsel from an experienced and qualified estate planning attorney, and also a qualified Certified Public Accountant before forming any irrevocable trust arrangement.


The information contained in this blog is for information purposes only and does not consistute legal advice or a substitute for legal advice provided by a qualified attorney in your jurisdiction.

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