Jane Dotson
Life insurance proceeds can be included in an estate's value if the life insurance policy is not structured correctly. If the estate surpasses the exemption limit in the year that the insured passes away, this can lead to significant taxes, particularly for policies with sizable death benefits. In 2024, the exemption limit for an individual in New York was $13.61 million. Establishing an Irrevocable Life Insurance Trust (ILIT) can help you work around income rules and asset limits, ensuring that insurance proceeds are distributed in a way that won't cause eligibility issues.
| Characteristics | Values |
|---|---|
| Exemption limit for an individual | $13.61 million (2024) |
| Irrevocable life insurance trusts (ILITs) | A way to work around income rules and asset limits |
What You'll Learn
How to avoid paying estate taxes
If you're looking to avoid paying estate taxes in New York, there are a few strategies you can consider. Firstly, it's important to understand the estate tax exemption limit, which is the value up to which an estate is exempt from taxation. In New York, the exemption limit for 2024 is $13.61 million. This means that if the value of your estate is below this threshold, you won't have to pay any estate taxes.
However, if your estate surpasses this limit, you may be subject to significant taxes, especially if your life insurance policy includes sizable death benefits. To avoid this, you can consider establishing an irrevocable life insurance trust (ILIT). An ILIT allows you to work around income rules and asset limits by giving the trust control over insurance proceeds, which can then be distributed in a way that won't affect eligibility for certain benefits. While the terms of an ILIT cannot be changed, you do have the right to condition how the insurance proceeds should be used and redistributed. This can be particularly useful if you're concerned about the impact of your life insurance policy on the value of your estate and the well-being of your heirs.
Another strategy to consider is to structure your life insurance policy correctly. Life insurance proceeds can be included in the value of your estate if the policy is not structured appropriately. By taking the time to carefully plan and structure your life insurance, you can ensure that it doesn't inadvertently increase the value of your estate beyond the exemption limit, triggering additional taxes.
Additionally, it's worth noting that estate taxes vary from state to state. While New York does have an estate tax, it's important to be aware of the specific rules and regulations in your state, as they may differ. Consulting with a financial advisor or estate planning attorney can help you navigate the complexities of estate planning and ensure that you're taking advantage of all available strategies to minimise your tax burden.
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The advantages of an Irrevocable Life Insurance Trust (ILIT)
In New York, if the value of an estate surpasses the exemption limit in the year that the insured passes away, this can lead to significant taxes, particularly for policies with sizable death benefits. For an individual, the exemption limit was set at $13.61 million for 2024.
An Irrevocable Life Insurance Trust (ILIT) can be a useful way to work around these income rules and asset limits. It lets the trust retain control over insurance proceeds, which can be distributed in a way that won't cause eligibility issues. While you can't change the terms of an ILIT, you do have the right to condition how insurance proceeds should be used and, eventually, redistributed.
The main advantage of an ILIT is that it allows you to distinguish between a deceased person's estate assets and their trust assets. This can be very important for those worried about paying estate taxes or providing an inheritance to a loved one with special needs. An ILIT can help protect the sanctity of an estate and the well-being of heirs.
ILITs are particularly useful for those whose life insurance policy poses a risk to the value of their estate. They can also help to avoid the two big threats when it comes to structuring estates in New York: the state estate tax and its federal counterpart.
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How to structure your life insurance policy correctly
Life insurance proceeds can be included in an estate's value if the life insurance policy is not structured correctly. If the estate surpasses the exemption limit in the year that the insured passes away, this can lead to significant taxes, particularly for policies with sizable death benefits. For an individual, the exemption limit is set at $13.61 million for 2024.
To structure your life insurance policy correctly, you can establish an Irrevocable Life Insurance Trust (ILIT). This lets you work around income rules and asset limits, allowing the trust to retain control over insurance proceeds and distribute them in a way that won't cause eligibility issues. While you can't change the terms of an ILIT, you still have the right to condition how insurance proceeds should be used and eventually redistributed.
An ILIT is particularly useful for those whose life insurance policy poses a risk to the sanctity of their estate or the well-being of their heirs. It can help you avoid the state estate tax and its federal counterpart.
It's important to note that inheritance taxes vary from state to state. While New York does not have an inheritance tax, it's essential to be aware of the potential tax implications of your life insurance policy and seek professional advice to ensure it is structured correctly.
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The difference between a deceased person's estate and trust assets
In New York, a life estate is considered a "limited interest in real property" by the State Department of Social Services. This means that the state will not require the sale of the property nor place a lien on it as a condition of Medicaid paying for a person's care.
Life insurance proceeds can be included in an estate's value if the life insurance policy is not structured correctly. If the estate surpasses the exemption limit in the year that the insured passes away, this can lead to significant taxes, particularly for policies with sizable death benefits. For an individual, the exemption limit was set at $13.61 million for 2024.
Establishing an Irrevocable Life Insurance Trust (ILIT) can help to work around income rules and asset limits. It lets the trust retain control over insurance proceeds, which can be distributed in a way that won't cause eligibility issues. While you can't change the terms of an ILIT, you still have the right to condition how insurance proceeds should be used and eventually redistributed.
The distinction between a deceased person's estate assets and trust assets can have massive implications for New Yorkers worried about paying estate taxes or providing an inheritance to a loved one with special needs. For example, a person with a progressive illness who is ineligible for long-term care insurance may have to apply for Medicaid as their health declines. By drafting a deed that retains a life estate for them with the remainder to their beneficiary, they can protect their assets from Medicaid recovery by the state.
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How to avoid inheritance taxes
Inheritance taxes can be avoided in some situations, but the rules vary from state to state. In New York, the exemption limit for an individual is $13.61 million for 2024. If the estate surpasses this limit in the year that the insured passes away, this can lead to significant taxes, particularly for policies with sizable death benefits.
One way to avoid inheritance taxes is to establish an irrevocable life insurance trust (ILIT). This type of trust offers a significant advantage over its revocable counterpart because it is irrevocable, meaning you can't make changes to it. As a result, the government will usually distinguish between a deceased person's estate assets and their trust assets. This distinction can have massive implications for New Yorkers worried about paying estate taxes or providing an inheritance to a loved one with special needs.
An ILIT lets you work around income rules and asset limits by allowing the trust to retain control over insurance proceeds, which can be distributed in a way that won't cause eligibility issues. While you can't change the terms of an ILIT, you still have the right to condition how insurance proceeds should be used and, eventually, redistributed.
It's important to note that the rules and regulations regarding inheritance taxes can be complex, and it's always a good idea to seek professional advice when planning your estate.
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Frequently asked questions
For an individual, the exemption limit is $13.61 million for 2024.
An ILIT is an irrevocable life insurance trust. This means that the terms of the trust cannot be changed, but you still have the right to condition how insurance proceeds should be used and redistributed.
An ILIT lets you work around income rules and asset limits. It also lets the trust retain control over insurance proceeds, which can be distributed in a way that won't cause eligibility issues.
Since the government distinguishes between a deceased person's estate assets and trust assets, an ILIT can help protect your estate and provide an inheritance to a loved one with special needs.
