Sunday, January 28, 2007

ILIT to Save Estate Taxes. Don't you?

Normally if you own a life insurance policy, the death benefit proceeds are included in your taxable estate. Depending on your financial situation this may or may not create a taxable estate for you. With estate tax rates topping out at 45%, it is certainly worth considering some options to avoid having your family pay taxes on those insurance proceeds.

One option is to have the insurance policy owned by an irrevocable trust (sometimes called an irrevocable life insurance trust or "ILIT"). Properly structured, you can provide a mechanism to pass those insurance proceeds to your intended beneficiaries and not included in your taxable estate. There are different rules if it is an existing policy versus whether you are purchasing a policy.

However, the downside with an ILIT is that it is can't change the trust. Generally speaking with estate taxes, the more control and "strings" you control over an asset the more likely it will be included in your taxable estate. Thus, by cutting your control, you potentially remove it from your estate. By being irrevocable, you can't change the beneficiaries or pull the funds out of the trust. Like everything else in life, there are "give and takes".

There are methods in enabling the policy to be transferred to a new trust, but there are costs and hoops to jump through and should not be counted on as a sure thing.

In summary, use of an ILIT gives a person an easy step to save in estate taxes and provide for the same beneficiaries, so long as the strings are cut.

Tuesday, January 23, 2007

Somebody Take Care of My Kids...Please!

A common inquiry I receive is "who should be the guardian for my children?" and "who should be the trustee for my children's funds?" There is not a right or wrong answer to these questions. Typically, for a guardian, you'll want to name a family member or close friend who would be willing and able to assume the responsibilities. Make sure that you discuss this issue with them and that they are comfortable with the possibility.

While that certain person you select as a guardian might be a great "substitute parent" (maybe even better than you) they may not be able to hold onto a nickel without blowing it. If so, then they might not be the best person to handle the money for your kids. It is not uncommon to have one person as the guardian and another as the trustee. While this may add an additional level of complexity to the situation, it also provides for a "check and balance" system. The trustee can make sure that the funds are properly being utilized for the kids and the guardian will make sure that the kids' needs are taken care of. A trustee, if not a bank or trust company, should be someone who is comfortable with making financial decisions or associating with advisors for making decisions, handle investments and address tax returns. They should also be organized and capable of making tough decisions for the best interests of the kids.

Discussions with your spouse and family are important. Together, with the advice of legal counsel, you can select a structure that will be the best solution for your children in an unfortunate situation. . . your death.