LTC letters being sent by States

[somarco]

ILIT is to keep the death proceeds out of the estate.

 

[Newby]

I understand now. I don't know why I was thinking that people with money would be comfortable on medicaid. I wasn't sure how much worse medicaid care is compared to someone who pays. What do people use ILIT's for?

A common use for an Irrevocable Life Insurance Trust in Indiana is for Funeral Insurance. Indiana law requires all funeral policies to be in an irrevocable trust so they are not subject to a Medicaid spend down.

People have to realize that though that once they put money in there it's "Jacks, Smacks, no tag-backs" (a legal term I learned on the playground in the 2nd grade.) You can not cash out the policy for the rest of your life and any amount used on the funeral will go through the estate and go directly to Medicaid if you were on Medicaid.

 

[senior-advisor-indiana]

Life insurance by itself avoid the estate if you name a beneficiary. I can see the use for funeral plans.

 

[Guest]

Life insurance by itself avoid the estate if you name a beneficiary. I can see the use for funeral plans.

Life insurance proceeds do NOT "avoid the estate if you name a beneficiary." They only avoid probate. The death benefit IS includable for estate tax purposes UNLESS the insured was not the owner of the policy (hence the purpose of the ILIT...to own it).

In other words, in 2007, if a person has an estate valued at $2 million on his date of death, plus he owns a life insurance policy with a death benefit of $1 million, his total estate would be $3 million. This year and next, $2 million of the total would be excluded from estate taxes, but $1 million would be taxable (for which his estate would pay about $345,800 in estate tax). If he had set up an ILIT to own the policy, making gifts to it for the benefit of the trust's beneficiaries but used by the trustee to pay the life insurance premiums, his estate would be completely estate tax free.