Insurance is an important asset to have as you build or prepare an estate. What the insured in Texas face, however, are taxable annuity withdrawals. Without something in place to shelter your payouts from taxes, you’re exposed to the full extent of the tax law. The good news is that estate planning offers legal ways of avoiding insurance taxes.
What is a trust?
A trust is an estate planning tool that acts as a tax and debt shelter for the assets placed within it. The trust itself is an agreement between you and a trustee—for the benefit of your beneficiary. As the grantor, you create the trust and its instructions. As your trust’s overseer, the trustee manages the assets of the trust for your beneficiary.
The irrevocable life insurance trust (ILIT)
One of the main reasons that trusts can shelter assets from taxes has to do with inaccessibility. Like a retirement account with deferred withdrawals, the taxation of a trust’s contents is delayed. For the reason of maximum protection, estate owners prefer irrevocable trusts. The irrevocable life insurance trust (ILIT) is one that protects your life insurance annuities from taxation.
Being irrevocable makes the ILIT trust powerful when sheltering your assets. The terms you must abide by through an irrevocable trust get set in stone. Since this often means that you can’t change the directives or use of the trust, the holdings of that trust don’t get exposed to any taxable event. Only when the contents of a trust are withdrawn or transferred are they exposed.
Estate planning in Texas
Avoid probate, and use a trust to keep your assets private or away from creditors. By choosing an ILIT trust, you protect your insurance from divorce, creditors and even from disputes your beneficiaries have.