From our “Ask a Question” mailbag: My wife’s and my estates are worth about $3,000,000, including a one million dollar life insurance policy on my life. At my death, my wife will receive the benefits from that policy. Upon both of our deaths, our assets pass to my son. Now that the federal estate tax exemption is over five million dollars, does an Irrevocable Life Insurance Trust provide me any benefit?
Don’t forget about the Pennsylvania Inheritance Tax!
You are correct: by using you and your wife’s exemption, you can easily avoid the 40% federal estate tax. But, if you die first and the life insurance passes to your wife, at her death that $1,000,000 is cash (not life insurance) and is subject to the 4.5% Pennsylvania Inheritance Tax. That is a $45,000 tax.
Instead, I can draft for you an Irrevocable Life Insurance Trust (ILIT) into which you can transfer your policy. As long as you live one more year after creating the trust, that $1,000,000 will then be available for your wife if she needs it but, at her death, it will avoid the $45,000 in Pennsylvania inheritance tax.
So to answer your question, an Irrevocable Life Insurance Trust can certainly provide you with a significant tax benefit.
If you have any other questions about Estate Planning in Pennsylvania or Pennsylvania Insurance Trusts, feel free to contact our office for a free consultation wit one of our Philadelphia Estate Planning Attorneys.