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What's the purpose of establishing an irrevocable life
insurance trust?
The aim of an irrevocable ife insurance trust is to
keep the death benefits from a life insurance policy outside of the
policyholder's estate -- and thereby remove the chance that the
proceeds will be subject to a federal estate tax that can reach as
high as 55%. According to "Wealth Enhancement &
Preservation" (The Institute Inc., Denver, Colo.), "A
properly established irrevocable life insurance trust owns life
insurance on the life of the trust maker, thereby keeping the life
insurance proceeds outside of his or her estate and avoiding federal
estate tax (federal income tax is also avoided for different
reasons). An irrevocable life insurance trust keeps policy proceeds
free of federal estate tax upon the death of the trust maker and also
on the subsequent death of his or her spouse. "The proper use of
this type of trust allows the trustees to satisfy the trust maker's
estate settlement costs and death tax obligations without subjecting
the insurance proceeds to those costs and taxes. By utilizing this
planning vehicle, a 50% federal estate tax bracket taxpayer can
purchase half as much life insurance as he or she would own
personally and still get the same after-tax insurance benefit for his
or her beneficiaries. Or he or she could double the amount of the
coverage passing to his or her beneficiaries without paying a dime
more of premium."
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