At least one of the financial providers in a family should be covered by life insurance. A policy should always be in place in case one of the main breadwinners dies. This way, if the breadwinner dies and the family has no other source of income, the family can still take care of itself.
When the owner of an insurance policy dies, the estate or "death" tax can be as high as 55%. Many families can't pay these high taxes and keep living the way they are used to at the same time. So, we've put together some tips to help make sure that your family gets the most out of your life insurance policy and doesn't have to give so much of it to the government.
First of all, you should know that your beneficiaries will get a tax-free share of your estate. The amount of money that isn't taxed changes from year to year, but here's a quick rundown: In 2004 and 2005, the amount each person could keep was $1.5 million. The exclusion is $2 million from 2006 to 2008, and it is $3.5 million in 2009. In 2010, the estate tax is no longer in place, but it will be back in 2011 with a $1 million exemption. Now, that can be hard to understand!
Because the government can take so much of your estate to pay taxes, it's important to use a variety of Trusts to protect as much as possible. The Irrevocable Life Insurance Trust, or ILIT, is one of these Trusts.
When you set up an ILIT, you'll choose a trustee to run it. Your financial advisor or one of your beneficiaries can be your trustee. Your trustee will buy a policy on life insurance for you. When you die, the death benefit from the policy will give the assets in your Trust cash.
With an ILIT, you can decide how the estate is split and how the money is spent. Having control over your own estate after you die may be especially helpful if you have young adults who will get a large amount of money. You can list which funds will be used for education, which for living expenses, and which for other things. So, you can use parts of your estate to pay for whatever you want.
You can also change who owns the life insurance policy that you already have. But there are problems that could come up because of the transfer. You should talk to an experienced lawyer to make sure you understand how the system works. For instance, if you die within three (3) years of transferring ownership of your existing policy, the life insurance policy will be taxed as part of your estate.
With the right help, it doesn't have to be hard or complicated to figure out how to handle your life insurance and your estate in general. Talk to an attorney to find out more about how to set up your ILIT or other Trusts so that your beneficiaries can get the most out of your assets.
