Minimize Estate Taxes Using Irrevocable Life Insurance Trusts

An Irrevocable Life Insurance Trust (ILIT) is a very important estate planning tool that provides many benefits, the most beneficial of which is tax savings. An ILIT is an irrevocable (non-amendable) trust that is both the owner and the beneficiary of one or more life insurance policies.

If the insured is a married person, the non-insured spouse and children are most often beneficiaries of the ILIT. If the insurance policy is a “second to die” where both spouses are the insured and the insurance proceeds are paid when both spouses are deceased, typically the children are beneficiaries of the ILIT. Upon the death of the insured, the ILIT becomes the owner of the insurance proceeds. The trustee of the ILIT manages and invests those proceeds for the benefit of one or more beneficiaries as indicated in the ILIT. The creator of the ILIT determines in what proportion, how, when, and under what circumstances the beneficiaries will receive their share of the insurance proceeds under the terms of the ILIT.

An ILIT can provide extraordinary tax savings. Payments to the premiums of the policy are considered gifts to the ILIT. Therefore, any payment to one insurance policy by one person over the annual gift tax exemption amount ($14,000 in 2017) will trigger a taxable event. To prevent this, the ILIT trustee can send a letter to the beneficiaries indicating that they can ask for their share of the money within a specific time period (referred to as “Crummy letters” after a U.S. tax case). If the beneficiaries do not elect to take their share within that period, premium payments over $14,000 per year to each policy will not trigger a taxable event. There is clear disincentive for the beneficiaries to take the money, since doing so will cause the insurance policy to expire.

The biggest benefit of setting up an ILIT is that the insurance policy proceeds payable to the ILIT are not included in a person’s taxable estate. Therefore, you can use income and assets that would otherwise be subject to estate taxes to pay premiums on the insurance policy, converting taxable assets to non-taxable assets.

If the value of your estate is over the estate tax exemption amount, an ILIT can still provide many benefits. Individuals or married couples whose estate consists mostly of real property or otherwise illiquid assets can benefit greatly from an ILIT. When these individuals pass away, estate taxes must be paid. Consequently, some assets must be liquidated. However, the terms of an ILIT can require that the insurance proceeds are used to pay estate taxes first, and then paid to the beneficiaries indicated in the ILIT. This is important if you want to ensure the family business, artwork, or other sentimental or potentially high income-producing properties remain in the family for generations. You can also use a Family LLC to assist with these goals. If you have any questions or concerns regarding these matters, please do not hesitate to contact the Law Offices of Tyler Q. Dahl.

Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.

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