Avoid estate taxes with an irrevocable life insurance trust

Oklahoma does not collect estate taxes, unlike some other states. However, people may have to pay federal taxes. In 2013, the U.S. Congress approved a permanent estate tax exemption that adjusts each year with inflation. Today, the exemption threshold is at $5.43 million, meaning people with assets totaling less than that can avoid the 40 percent tax rate.

Someone’s wealth may be worth more than $5.43 million, but using estate planning tools can help position assets to be excluded from the taxable sum. For example, Forbes magazine notes that creating an irrevocable life insurance trust will enable the trust to own an insurance policy, thus keeping it out of the total value of the estate.

The American Bar Association points out that in addition to tax savings, there are several other benefits to using a life insurance trust, such as the following: 

  • It enables professionals to manage the asset.
  • It provides the person creating the trust with some flexibility, as he or she will still have some minor controls.
  • It gives the asset protection from any creditors going after the beneficiary.

While the person who sets up the trust will be able to make sure the premiums are paid, he or she has relinquished ownership and therefore will not be able to change the beneficiary, convert the policy or use the policy to borrow money.

Anyone taking this course of action should also be aware of the three-year look-back rule. This states that if the person who transferred the policy into the trust dies within three years of doing so, then the proceeds from the policy will be added to the value of that person’s estate. Therefore, federal estate taxes could still apply to those using an irrevocable life insurance trust.

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