liability status, see the LLC. To obtain family limited liability protections including the charging order, and favorable pass-thru taxation, or favorable single-member ownership taxation, see the LLC below.
6. Irrevocable Life Insurance Trust (ILIT). Contrary to common myth, life insurance is generally taxable at your death (as it is included in your estate valuation). However, life insurance originated or placed into an irrevocable life insurance trust, is generally not taxable to the deceased estate. The irrevocable life insurance trust is generally non- amendable and often used to hold and receive life insurance which removes the value of it from the settlors estate for estate tax purposes. There are strict rules of compliance and exceptions. For example, settlors or owner of the policy may be the trustee or retain unfettered control over the trust or incidents of ownership over the policy may have potential estate liability for those policies, and life policies transferred within 3 years of death may not avoid estate taxation. However, the ILIT is one of the most effective methods to avoid taxation of life insurance proceeds, reduce the value of your estate, and reduce estate taxes. The use of insurance has been key to the financial health of the upper middle class and the rich. Life insurance is often used for tax-cost-wealth-replacement, and as a wealth creator for surviving spouses, heirs, and future generations.
California law supplies protection of life insurance from creditors as follows:
CCP 704.100. (a) Unmatured life insurance policies (including endowment and annuity policies), but not the loan value of such policies, are exempt without making a claim.
(b) The aggregate loan value of unmatured life insurance policies (including endowment and annuity policies) is subject to the enforcement of a money judgment but is exempt in the amount of nine thousand seven hundred dollars ($9,700). If the judgment debtor is married, each spouse is entitled to a separate exemption under this subdivision, and the exemptions of the spouses may be combined, regardless of whether the policies belong to either or both spouses and regardless of whether the spouse of the judgment debtor is also a judgment debtor under the judgment. The exemption provided by this subdivision shall be first applied to policies other than the policy before the court and then, if the exemption is not exhausted, to the policy before the court.
(c) Benefits from matured life insurance policies (including endowment and annuity policies) are exempt to the extent reasonably necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.
Also, disability, business interruption, or income replacement insurance are often used as a means to income stability. Life insurance is also critical for effective business planning. For example, life insurance is critical for key-man, buy-sell and certain joint venture business agreements. You should seek the advice of a professional insurance agent, as all insurance is not created equally.