Irrevocable Life Insurance Trust (Alit)

One of the main reasons we buy life insurance is so that when we die, our ladies have enough money to pay our outstanding debt and final expenses. We also buy life insurance to provide for our loved ones future living expenses, at least for a while. That is why it may seem unfair that life insurance proceeds can be reduced by estate taxes. That's right, the general rule is that life insurance proceeds are subject to federal estate tax (and, depending on your state's laws, state property tax as well). This means that as much as 45% of your life insurance proceeds could go to Uncle Sam instead of your family as you want. Fortunately, proper planning help protect your family financial security. 

Most important is ownership

Generally, all property you own at your death is subject to federal estate tax. The important point here is that property tax is levied only properties where you have an ownership interest, so if you do not own your life insurance proceeds will generally avoid this tax. This raises the question: Who will own your life instead? For many, the answer is an irrevocable life insurance trust, or Alit (pronounced "eye-lit"). 

Tips: Generally, each of us has a lifetime estate tax exemption (currently 2 million U.S. dollars), so only individuals with estates that exceed the exemption amount should be concerned about planning for estate taxes. 

What is an Alit?

An Alit is a trust primarily set up to hold a life insurance. The main purpose of an Alit is to avoid federal estate tax. If the trust is drafted and funded properly, your loved ones receive all your life insurance proceeds, undiminished by estate taxes. 

How does an Alit 

Because an Alit is an irrevocable trust, it is considered as a separate entity. If your life insurance policy held Alit, you do not own the political trust does. 

You name Alit as a beneficiary of your life insurance policy. (Your family will ultimately receive the proceeds because they will be named recipients of Alit.) This way, there is no danger that the proceeds will end up in your property. This could happen, for example, if the named beneficiary of your policy was a person who dies and you die before you have a chance to mention a second. 

Because you do not own and your property will not be the recipient of the dividends, your life escapes estate taxation. 

Caution: Because an Alit shall be irrevocable when you sign the trust agreement, you can not change your mind, you can not terminate the trust or change its terms. 

Creating an Alit

Your first step is to develop and implement an Alit agreement. Because the precise wording is crucial, you should hire an experienced lawyer. Although you will have to pay lawyer fees, the potential estate tax savings more than offset this cost. 

Naming Trustee 

The administrator is the person responsible for managing the trust. You must choose an administrator carefully. Neither you nor your spouse will act as trustee, as this can result in life insurance proceeds are withdrawn in your property. Choose a person who can understand the purpose of trust, and who are willing and able to perform administrator tasks. A professional trustee, as a bank or trust company may be a good choice. 

Financing a Alit 

A Alit may be financed in two ways:

   1st Transferring an existing policy, you can transfer your existing policy to the trust, but be warned that under federal tax rules, you have to wait three years for Alit to be effective. This means that if you die within three years after the transfer, the proceeds will be subject to estate tax. Your age and health should be considered when deciding whether to take that risk. 

   2nd Buy a new policy to avoid the three-year rule stated above, you can get trustee on behalf of trust, buy a new policy on your life. You may not make this purchase you; you must transfer money to the trust and allow the administrator to pay the initial premium. So that future annual premiums due, you must continue to make transfers to the trust, the trustee continues to make payments to the insurer to keep the policy in force. 

Gift tax consequences

Because an Alit is irreversible, all cash transfers you make the trust is considered taxable gifts. But if the trust is created and administered appropriate transfer of $ 12,000 or less per trust beneficiary will be free of federal gift tax under the annual gift tax exclusion. 

In addition, as each of us has a life estate tax exemption, we also have a lifetime gift exemption, then transfers that are not covered under the annual gift tax exclusion will be free of gift tax to the extent that your available exemption. The gift tax exemption amount is $ 1 million. 

Crummy withdrawal

Generally, a gift is a present interest gift to qualify for the annual gift tax exclusion. Gifts to an irrevocable trust, as an Alit, usually considered gifts of future interests do not justify the exclusion unless they fall under an exception. One such exception is when the trust beneficiaries are entitled to demand for a limited period, amounts transferred to the trust. This is known as crummy withdrawal rights or powers. To qualify your remittances to Alit for the annual gift tax exclusion, you must give the trust beneficiary of this right. 

The confidence of beneficiaries must also have actual written notice of their rights to pull, when you transfer money to Alit, and must have a reasonable time to exercise their rights (30 to 60 days is typical). It is the duty of trustee to give notice to each beneficiary. Of course, so not the purpose of the trust, the trust beneficiaries not actually exercise their crummy withdrawal, but must let their rights lapse.