Solomon & Hoover CPAs, PLLC Blog

Do you worry that your heirs won’t have sufficient cash to pay estate taxes when you die? Or that your life insurance policy’s value might cause you to exceed your lifetime estate and generation-skipping transfer tax exemptions?

An irrevocable life insurance trust (ILIT) — which removes your policy’s proceeds from your taxable estate — is a potential solution. However, understand that, when you place a life insurance policy in an ILIT, you relinquish ownership and control. You appoint a trustee to handle tasks such as changing beneficiaries and making adjustments to the policy.

Another potential drawback: For your insurance proceeds to be excluded from your estate, you must live for three years after transferring the policy to the ILIT. However, the three-year rule doesn’t apply if you instead contribute funds to the trust and the ILIT purchases a new policy.

ILITs can be complicated, and they need to be set up properly by a professional. Talk with your financial advisor about whether an ILIT is appropriate for you or if another type of trust might better meet your needs.

© 2012 Michele M. Hoover, CPA. Alexander & Hoover, P.A., Certified Public Accountants, specializes in providing a wide range of diversified accounting, tax, finance, and consulting services to individuals and businesses.