A Classic Bad Assumption



It’s all too common to meet people who have made a classic mistake in their estate planning.

I asked my personal attorney, advisory board member and good friend, Robert Munoz, about this error in planning and his response was as follows:

“One estate planning tip that everyone should be aware of is utilizing an Irrevocable Life Insurance Trust (“ILIT”) to hold your life insurance proceeds at death so that they are outside your taxable estate. Many people assume that life insurance, because it is income tax free is also estate tax free. Not so! In fact, life insurance is in the estate of the owner of the life insurance policy. Thus, the critical issue is the owner of the life insurance policy.

We instruct our clients that in order to avoid taxation of life insurance proceeds, they should consider placing the proceeds in an ILIT. In fact, an ILIT is specifically designed to hold life insurance by accepting a transfer of ownership to the trust to avoid potential estate taxation at death. However, the trust must be structured so that the grantor of the trust does not retain any right indicative of ownership.

                It is our further recommendation that you contact your attorney and life insurance professional to discuss the creation of an ILIT if the strategy is appropriate for you. Delaying the creation of the ILIT has potential consequences. In order for a life insurance policy to be outside one’s estate, the insurance policy must be in the trust for a period of three (3) years prior to death. Thus, the delaying action could result in a financial calamity. In contrast, if one is about to purchase life insurance, the trust can be created and before the life insurance is purchased. If the trust purchases the life insurance, the three (3) year period is not applicable.

                Whether you are over 50 or not, you should be looking at your life insurance policy and how it fits into your financial plan to determine whether or not an ILIT is a better strategy.”


Thanks Bob (sorry about your NJ Devils this year).