Man Filling out The Form and Working on the Computer


Gregory S. DuPont May 28, 2019

Most estate planning professionals view the irrevocable life insurance trust (ILIT) as one of the most flexible and powerful tools they can put to work on behalf of their business clients. While the issue of where the life insurance trust fits into the overall estate planning process can often be confusing, a closer look reveals its many potential advantages.

An irrevocable life insurance trust can be designed to function as the fundamental basis for an effective and tax-efficient estate plan. Constructed to play a vital role in estate planning, it also functions to solve your business planning and tax planning problems.

Preserving the Family BusinessIn addition to being a source of liquidity to help pay estate settlement costs, the trust may assist, in a number of ways, in maintaining family control of your business and may help create a smooth transition when ownership is transferred to a younger generation. Here are some other issues to consider:

Cash Flow—Additional cash may be provided to the corporation through the trust, by purchasing assets from the corporation and may even utilize a purchase lease-back arrangement.

Deferral of Estate Taxes—The trustee is given power to assist the estates of both you (the grantor) and your spouse to defer payment of estate tax under the installment payment provisions of IRC Section 6166. For example, distribution of trust assets may be postponed until taxes have been paid to provide whatever security is needed to obtain the right to pay in installments.

Favorable Valuation—your estate may elect to value real property used in a closely-held business on the basis of its actual use as opposed to the traditional approach of best or highest use of property. The result could be a lowering of the estate tax value of the property. If this favorable treatment is chosen however, the Internal Revenue Code (IRC) deems that the property must continue to be used in the business for a period of years after your death.

A lien will automatically be placed on the property to aid in collecting any additional estate tax due if this qualified use ceases within the time specified. The trust is constructed to help your estate qualify for this benefit by accepting property subject to such tax lien or by paying any additional tax if property held in trust ceases to qualify for this favorable valuation.

Control of Business—Closely-held stock from your estate may be purchased by the trust and either held for your family’s benefit or distributed to members of the younger generation who are capable of managing the family-owned business.

The three objectives this will accomplish are as follows:

1) Your children may be given control of the business without waiting for the death of your spouse.

2) The growth of the closely-held stock will be removed from your spouse’s marital share, in which it would’ve been taxed at its appreciated value.

3) Funding the marital deduction trust with closely-held stock is now unnecessary. Closely-held stock that doesn’t pay dividends may jeopardize the marital deduction unless your spouse is able to convert the stock into income-producing property. Your spouse’s power to force the sale of the stock may enable him or her to dispose of the business interest even though held in a marital trust, and may thus cause your family to lose control of the business. If there are assets in the trust to buy the stock, the trustee of the marital trust, who is forced to sell trust assets, may sell them to the trust.

As you may realize from just the few topics touched upon in this article, an irrevocable life insurance trust can be a complicated, but very beneficial, estate planning technique. Therefore, now may be the time to consult your financial professional to put this valuable planning tool to work for you, your business, and your family.