After your death, all assets that you owned in your individual name at the time of your death will be listed on your Federal Estate Tax Return. If the value of his estate is above the estate tax threshold for that year, an estate tax will be due. In 2011, the estate tax threshold will be $1 million and the estate tax will be a whopping 55 (fifty-five) percent. Estate taxes must be paid in cash within nine (9) months of death. For every dollar over the first million, your estate will be taxed 55 cents. A million dollars may sound like a large amount of money, but it is actually quite small when you consider that it includes life insurance proceeds, home equity, stocks, bank accounts, retirement accounts, jewelry, paintings, and any anything else you want. it may have had a title in his name at the time of his death.

One approach to providing available cash to pay these taxes and other expenses is through life insurance proceeds. The proceeds can be paid to the federal government instead of your heirs having to liquidate assets to pay the estate tax bill. Life insurance provides an income tax-free death benefit, but the value of the benefit is added to the total assets in the estate if not properly structured. This creates an endless cycle of taxes and insurance policies. The way to avoid this outcome, limit or eliminate your estate tax, and provide tax-free money to your beneficiaries is to hold life insurance policies in an irrevocable life insurance trust, or ILIT.

An ILIT combines the protection of a trust with the liquidity of life insurance benefits. Using the $13,000 per year gift tax exclusion, you can donate assets to ILIT annually to cover insurance premiums with no tax consequences. Upon your death, the proceeds are transferred to your heirs free of all income tax and all estate tax. This will provide the necessary liquidity that your heirs will need to pay for your funeral costs, estate taxes, probate fees, and settlement costs.

Upon your death, the ILIT trustee will make appropriate distributions from cash proceeds to cover debts, taxes, and funeral expenses. The trustee could even buy some or all of the business from him with the cash proceeds and manage it professionally until his children were old enough to take over. The trustee may also make appropriate loans for the spouse, children, and business.

An ILIT provides flexibility and tax advantages. To learn more about ILITs and determine if they are the right vehicle for you, contact your South Florida estate planning attorney.