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Gregory S. DuPont Dec. 13, 2019

What Is The Purpose Of An Irrevocable Life Insurance Trust?

Many estate planning practitioners view the irrevocable life insurance trust (ILIT) as a flexible and useful tool that can provide a number of benefits to their clients. Because the question of where the ILIT fits into the overall estate planning process can be somewhat confusing, a closer look at its potential advantages may prove helpful.

Inheritance Comes with a Price

Typically, the amount of estate planning necessary is dictated by the size of your assets. For instance, if you are married, a properly drafted and executed will and living trust for you and your spouse — coupled with proper asset ownership — may only ensure that the first $10.5 million in 2013 (annually adjusted for inflation) of your estate passes to heirs free of Federal estate taxes. In 2013, the top tax rate increases to 40% due to new legislation.

Thus, estates exceeding $10.5 million for married individuals in 2013 (or $5.25 million per individual) are subject to Federal estate taxes. For this reason, the ILIT has become a popular technique to help fund the payment of estate taxes and to help ensure that assets are passed to your family in full.

Opportunity Knocks

The proceeds of a life insurance policy that is purchased and owned by an ILIT, if correctly structured and administered, are not included in your estate. Instead, they may be payable to the ILIT’s beneficiaries (often children or grandchildren) without incurring estate tax consequences.

An ILIT can purchase a life insurance policy on your (the donor’s) life, with the policy premiums funded by annual gifts you make to the ILIT. Consequently, your annual gift tax exclusion ($14,000 annually per donee and $28,000 for gifts made by husband and wife) can be used to maximize gifts to the ILIT.

As a more advanced strategy, an ILIT can help ensure continuity in a closely held business. For instance, passing a family-owned business of substantial value to heirs may be hampered by potentially large estate taxes. These taxes, in some instances, may require a forced sale of the business to raise the necessary cash to pay them. However, an ILIT can purchase a life insurance policy on the owner, with the death benefit providing the cash needed to help meet estate tax obligations and keep the business in the family.

Preparing for Your Future

Estate planning is an ongoing process that requires a personal commitment to help ensure your desired intentions are fulfilled. An ILIT can be an integral part of your overall plan. Be sure to consult your estate planning team, including your insurance, legal, and tax professionals, about your unique circumstances.