A Florida Life Insurance Trust is an irrevocable trust that allows an individual to make the proceeds of a life insurance poliicy free from income taxes and estate taxes. Typical life insurance policies are income tax free, but many increase the value of one’s estate to the point that the federal and or state income taxes are due. By using an ilit one can avoid these taxation issues.
In 2008 the Federal tax exemption is $2,000,000. Lets take a client with 1.5M in assets and a 1M life insurance policy.
If they were to die in 2008 their estate would be valued at 2.5M and 500,000 would be subject to estate taxes. The current estate tax rate is 45% so this estate would have to pay a tax of $225,000.
In 2011 the estate tax exemption is only $1M. With an estate valuation of $2.5M, 1.5M would be subject to estate taxes. Using the same tax rate, this estate would have to pay $675,000.