Navigating US Estate Taxes - Life Insurance and ILITs
Adrian C. Spitters FCSI?, CFP?, CEA? President, Author, Private Wealth Advisor
I Execute Tax-Efficient Investment Portfolio Solutions So That Your Business, Family, And Estate Assets Are De-Risked And Protected Against Financial Risk, Economic Threats, Inflation And Higher Taxes.
Guest Contributor: Peter J. Merrick, TEP
The intricacies of US estate tax can be bewildering, especially for Canadians owning US assets and US citizens residing in Canada. A focal area of concern is the treatment of life insurance policies under US tax rules. However, there's a viable strategy available: the Irrevocable Life Insurance Trust (ILIT).
US Estate Tax and Life Insurance - The Dilemma: The US estate tax affects all US citizens, irrespective of their residence, and Canadians with US-based assets. Notably, the ownership of life insurance policies can drastically impact estate valuations, possibly subjecting one to heftier taxes. Essentially, if a US citizen or a Canadian with US assets holds a life insurance policy (i.e., can name a beneficiary, borrow against, or exchange the policy), it's added to their global estate's worth. This can sometimes push the estate value past the exemption limit, leading to hefty taxes.
ILITs to the Rescue: Enter the Irrevocable Life Insurance Trust (ILIT). It’s a legal tool that strategically excludes the life insurance policy from your global estate. Here's how it works: instead of holding the policy personally, you establish an ILIT to purchase and own the policy. As a result, since you don't own the policy anymore, it doesn't contribute to your taxable estate.
Key aspects of an ILIT:
Funding the ILIT: There's a catch. You should not transfer an existing insurance policy into an ILIT. Why? If done, US citizens might face a 40% US gift tax. Worse, if you die within three years post-transfer, the insurance returns to your taxable estate. Ensures the trust can handle the insurance premiums without being subjected to US gift taxes.
ILIT's Additional Perks: Beyond managing estate taxes, ILITs allow you to channel life insurance benefits to beneficiaries through tax-efficient routes, especially when considering their US citizenship status.
In essence, while US estate taxes can be complex, tools like ILITs offer strategic pathways to manage potential liabilities and safeguard your assets for your loved ones.
If you are a professional advising a client who falls into this situation or if you personally have cross-border interests in the US, Peter J. Merrick can answer these questions and more.
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Arrange a complimentary review with Peter J. Merrick to determine if your U.S. life insurance contracts remain tax-exempt in Canada. Let's set up a complimentary introductory meeting to review your policies by CLICKING HERE.
About the author. Peter J. Merrick, TEP, is a Commentator/Keynote Speaker & Expert in US/ Canadian/International Cross Border and Estate Planning and Insurance & Annuity Planning - Author of The Business Novel - The King of Main Street. To read reviews, please click here.
Who is Peter J. Merrick, CFP, TEP?
Over three decades, Peter specialized in de-risking and saving his clients up to 40% of their wealth that would have otherwise been paid out because of poor planning. These proven solutions effectively shelter income, reduce taxes on income and estates and defer or eliminate tax on investments and creditor-proof assets for domestic and international clients.
Peter is also an author.
Peter has written three comprehensive LexisNexis business, legal, tax, succession and estate planning textbooks. For 18 years, Peter wrote a column for LexisNexis called "The Bottom Line," one of the largest professional tax and accounting publications.?Peter was also a university and college finance and financial planning lecturer for over 12 years.
In 2019, Peter relocated to San Diego, California, from Toronto, Canada. Right now, he sees a number of wealth-saving opportunities resolving long-ignored issues for Canadians in corporate planning, cross-border US and international planning, financial, philanthropic, and estate planning implementation, utilizing Canadian/US Life Insurance and Canadian/US Annuity strategies.
Peter works with high-net-worth individuals and their legal, tax and financial professionals performing Canadian estate freezes and terminal tax planning, as well as those who seek to relocate to the US or have financial interests in the US from places like Canada and other national jurisdictions.
It is absolutely essential that you partner with and work with an expert familiar with the Canadian Income Tax Act, the IRS Tax Code, and US/International Tax Treaties before implementing any strategy in the areas of Canadian estate freezes, terminal tax planning, and cross-border planning.
Let's set up a complimentary introductory meeting with Peter J. Merrick to review your policies by CLICKING HERE.