Life insurance often plays an important role in the estate planning process since it can provide heirs with a source of funds that pass outside of probate and can more easily be accessed for final expenses and estate taxes. Mexicans who frequently do business in the United States are increasingly choosing to use U.S.-based life insurance policies as part of their estate planning process because they're able to obtain greater coverage with less expense than the policies that exist in the Mexican financial system.
Using an ILIT to Characterize a Death Benefit as an Inheritance
Proceeds from a U.S. life insurance policy are not income taxable when a beneficiary receives the death benefit. However, a beneficiary in Mexico who receives proceeds from a U.S. life insurance policy may be subject to income taxes in Mexico. An irrevocable life insurance trust (ILIT) solves this problem by characterizing the death benefit as an inheritance.
An ILIT is an irrevocable trust that owns the life insurance policy as its primary asset. Once the trust is established, the grantor can't generally modify or change the terms of the trust or reclaim any of the assets.
While every situation is unique, an ILIT trust works well when a family has heirs who remain in Mexico as well as heirs who are living in the United States. Recently, when creating an estate plan to benefit adult children living in both Mexico and the United States, we helped our client use an ILIT to reduce state and federal estate taxation in the United States and recharacterize the death benefit as an inheritance to avoid income taxation in Mexico.
An ILIT is established under state law, and there can be significant differences in each jurisdiction. Meeting with an experienced estate planning attorney who understands the unique challenges faced by the wealthy Mexican investor is the best way to ensure your trust is structured appropriately.
Get Estate Planning Advice That Fits Your Needs
MEG International Counsel’s experienced attorneys can help you learn more about the value of life insurance as an estate planning tool so you can ensure that your loved ones will be provided for no matter what the future may hold. To schedule a consultation with an international estate planning attorney, contact us today.