An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust that owns one or more life insurance policies. The trust is funded during your lifetime and typically cannot be amended. An ILIT can minimize the burden of estate taxes by providing a source of funds to pay them, and can give you the ability to control how your beneficiaries will receive the life insurance death benefit.
Minimize Estate Taxes – If you own life insurance personally, the death benefit proceeds will be included in the value of your estate for estate tax calculation purposes. However, when you put life insurance inside a trust, the trust is the owner of the policy. If the trust is structured properly, you have essentially moved the death benefit out of your estate. As of 2020, the estate tax exemption amount is $11.58M per individual or $23.16M for a married couple. Each dollar above the exemption amount would be taxed at 40%. An ILIT can prevent a potential fire-sale of other assets and provide liquidity to pay estate taxes that would be due nine months from the date of your death.
Control and Dynasty Provisions – An ILIT can determine how the death benefit from your insurance policy will be distributed to your heirs. If the death benefit stays in trust (Dynasty Provisions) with distributions fully discretionary by the trustee, the money would be protected from spendthrifts and any potential creditors (including divorcing spouses) of your beneficiaries.
Avoid Gift Tax Consequences – Contributions by you to the trust are considered gifts to your beneficiaries. This allows you to use your annual gift tax exclusion ($15,000 per beneficiary in 2020) to pay life insurance premiums. To be eligible to use your annual gift tax exclusion, the gifts must be of a present interest to your beneficiaries. This means your beneficiaries must be able to immediately access the assets. Your trustee will send out “Crummey Notices” to your beneficiaries giving them a certain period of time during which to withdraw the contribution to the trust. Once this period elapses, the Crummey power lapses, and the assets remain in the trust.
Provide Liquidity - ILITs not only provide liquidity to cover potential estate taxes, but they can also provide liquidity to equalize inheritances among heirs. If you have one family member that wants the family business and others that would prefer cash, an ILIT gives you the ability to equalize distributions across your beneficiaries.
The administration of an ILIT is not complicated, but there are necessary steps that must be taken by your trustee to administer it correctly. If the trust is administered incorrectly the IRS could potentially pull the life insurance death benefit proceeds into your estate. If IconTrust acts as the trustee of your ILIT, we would complete the following tasks:
The Tax Cuts and Jobs Act of 2017 raised the estate tax exemptions ($11.58M per individual or $23.16M for a married couple) to the point that 99.8% of the population will owe no estate tax. However, these laws are currently set to sunset and the exemptions will revert back to $5M per individual ($10mm for a married couple) in January of 2026. Further, changes in Congress may result in lower estate tax exemptions or other tax law changes that may impact the liquidity of your estate upon your death. An ILIT continues to be a valuable tool to ensure the liquidity for your estate.
ILITs are still relevant today and are a successful strategy to transfer wealth to your beneficiaries free of estate taxes and income taxes.
IconTrust’s fee to administer an ILIT is a flat $3,000 per year.
If you have any questions, please email email@example.com or call 702-998-3700