Experienced Estate Planning Attorneys Sorting out Tax Issues for Houston Families

Since Texas has no inheritance or estate tax, many Texans feel that, at their death, their heirs will never need to be concerned with a bill from the tax collector. While that may be true for most folks in Texas, since the federal gift and estate tax exemption is $5.49 million for 2017, if your family is involved in agriculture or a moderately sized business, values quickly add up. Worse, the federal estate tax bite can be as large as 40 percent. Many financial advisors and attorneys admonish such clients at least to consider the advantages offered by some irrevocable life insurance trusts (ILITs).

Aren’t Life Insurance Proceeds Included in One’s Estate For Federal Tax Purposes?

Many knowledgeable taxpayers say, “Wait a minute. Aren’t life insurance proceeds included in my estate for purposes of federal estate and gift tax law?” The answer is the same given for so many legal questions: It depends. If a Texas taxpayer purchases a standard life insurance policy and names his or her spouse or children as beneficiary, under most circumstances, the proceeds will be considered in determining whether the estate is subject to the federal estate tax. That is because, in most cases, the person whose life is insured is also the owner of the policy. A properly structured ILIT is an exception.

Irrevocable Life Insurance Trusts: What Are They?

An ILIT is created by a special trust document that is crafted by an experienced attorney. It must be created during the lifetime of the individual grantor and the trust – not the individual grantor – is the owner of the life insurance policy written on the life of the grantor. The grantor pays the premiums each year by making a gift to the ILIT. At the time when the ILIT is created, the grantor designates the beneficiaries and conditions of distribution within the ILIT document. The trust cannot thereafter be revoked or even modified by the grantor; the irrevocable nature of the ILIT is critical to the process.

What Can an ILIT Do for the Grantor?

Properly crafted, an ILIT can accomplish a number of important estate planning goals, including the following:

  • It can meet liquidity needs. Often, the net worth of a family is tied up in real estate or business assets. An estate can find itself over the federal estate tax threshold without liquid assets required to pay taxes and other expenses. The ILIT provides liquidity and yet, doesn’t increase the size of the tax bite.
  • It is an effective means of transferring wealth to loved ones.
  • Properly drafted, the ILIT can provide regular income to the children or grandchildren.

An ILIT isn’t for Everyone, But it May Be Suitable for Your Needs

The creation of an ILIT should only be accomplished through the assistance of a skilled, experienced estate-planning attorney. There are pitfalls to be avoided. Correctly drafted, the insurance proceeds not only do not form a part of the taxable estate; they generally are out of the reach of creditors. While the process for creating an ILIT is complex, it can be an important part of one’s overall financial and estate planning.

Romano & Sumner: Skilled, Caring Legal Advisors

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The attorneys at Romano & Sumner have more than 20 years of combined experience providing expert legal assistance to clients in all types of complex issues, including the creation of all types of trusts to protect and preserve your hard-earned wealth. At Romano & Sumner, we provide customized service; we know that each situation is unique. We never use a cookie cutter approach. We listen before we suggest a solution to your needs and issues. We pride ourselves not only upon our professionalism, but also upon our client service. We return phone calls within one business day. We keep clients informed. We complete the work within the allotted time frame. Call us at 281-242-0995 or complete our online contact form.