Many people don’t realize that proceeds from a South Florida life insurance policy are added to your property for property tax purposes if the policy was owned by the deceased during the last 3 years of their life. This is the case for more than 90 percent of all life insurance policies. While beneficiaries are not taxed on proceeds directly, estate will be taxed at a rate of 55 percent starting in 2011. Most of the time, life insurance beneficiaries are also representatives of the estate. This means that the government can tax your family coming and going if your plans are not well structured.
Due to the enormous tax implications of an Irrevocable Life Insurance Trust (“ILIT”), it is quite useful for South Florida estate planning purposes. An ILIT legal instrument designed by a South Florida estate planning attorney for the purpose of removing life insurance from your estate to reduce taxes and increase asset protection. You can designate a spouse, child, or other suitable person as trustee.
You can also provide detailed directions to the ILIT trustee, including how life insurance payments should be distributed, when the trustee should make payments, loans, or investments, what to do with the family business, who receives assets at the time of death. or disability of your original beneficiary, and when to terminate the trust. ILIT gives you control over money from the grave and protects your children from unnecessary responsibilities.
As you can see, structuring your life insurance policy so that ILIT holds life insurance benefits is useful for achieving a number of goals, including:
1. limit or eliminate land tax;
2. increase the level of assets available to your spouse, children, and loved ones or other entities after you leave; and
3. provide extra liquidity for cash-strapped assets or businesses.
Because the ILIT is a separate South Florida legal entity that is outside your estate, the IRS cannot levy property taxes on assets within the ILIT because they are beyond your control. Due to the fact that you can describe all of your goals and desires in the trust documents, and because usually the only asset in the trust for the rest of your life is your life insurance, it makes sense to trade in giving up control instead. for all tax benefits. The trustee will be the applicant, owner, and beneficiary of your life insurance, so the proceeds will never pass through your taxable property and property tax will be deducted 55 percent of the total life insurance benefit.
Having your own spouse or children and acting as a beneficiary of a South Florida life insurance policy on your life is another way to avoid estate taxes on your life; however, ILIT has the added benefit of also safeguarding the undistributed proceeds of the taxable estate of your beneficiary. A properly planned ILIT will limit or eliminate land taxes and generation-skipping taxes for several generations.
ILIT can also help you increase the assets available to your beneficiaries because it makes it easier to have one or more life insurance policies. The South Florida Trustee has a trust document as an efficient roadmap to follow with respect to purchases, premium payments, and distribution of proceeds. ILIT puts cash into your land by making distributions, purchases or loans as needed. The ILIT trustee makes appropriate distributions of cash proceeds to cover debts, taxes, and funeral expenses. The trustee can even buy part or all of the business with cash proceeds and run the business professionally until the kids are old enough to take over. Trustees can also make suitable loans to spouses, children, and businesses.
