If you have a substantial amount of wealth, using an irrevocable life insurance trust may be wise. As the Florida Department of Revenue points out, the state does not collect an estate tax. However, the federal government imposes a 40 percent tax rate on estates valued at more than $5.43 million. There are ways to keep assets out of that taxable sum, one of which is to set up an irrevocable life insurance trust.

As points out, using an irrevocable life insurance trust means you may be able to greatly reduce or even eliminate any federal estate taxes owed. Through this tool, the trust will own your life insurance policy, not you, so the policy will not be considered part of your taxable estate.

There are several important considerations to keep in mind if you are exploring this option, such as the following:

  •        Once you place the policy in an irrevocable trust, you cannot put it back in your name.
  •        You will be able to list the beneficiaries and outline terms for how they receive the funds.
  •        Using an irrevocable life insurance trust will protect the policy from your beneficiaries’ creditors.
  •        The policy in the trust will be exempt from probate.

Keep in mind that an irrevocable trust will be subject to the three-year look-back rule. This is applied to situations in which the decedent passes away within three years of transferring the trust. In that case, the value of the policy will be added into the taxable estate.

While this information may be useful, it should not be taken as legal advice.

Luis E. Barreto