Irrevocable Life Insurance Trust (“ILIT”).. still important?
Many of our clients created an ILIT to hold life insurance outside of their estate to provide liquidity to help their children pay estate taxes. Generally an ILIT is created to avoid the triggering aspects of IRC Section 2042 so life insurance on the decedent’s life is NOT includable in the decedent’s estate for estate tax purposes but is available to help pay estate taxes.
For example Bob has a wife with 2 children. His estate was 3 million when the exemption was 1 million. Even with the use of his wife’s exemption there would be an estate tax of approximately $490,000 (3 million less 2 million exemption times 49% (the top rate at the time)). Bob creates an ILIT with an independent trustee who purchases a 1 million death benefit life insurance policy on Bob’s life (or maybe a joint and survivor policy on both Bob and his wife). At both of their deaths the 1 million policy is payable to the ILIT and is not included in their estate for tax purposes but the monies are available to either loan to the estate to pay the estate taxes or the beneficiaries of the ILIT can pay the estate taxes.
With the current estate tax exemption above 5 million an ILIT may no longer be necessary for the purposes initially established. This does NOT mean that a client should stop paying the premiums or get rid of the ILIT. It just means that this is a great time to review the ILIT to ascertain whether the policy could be exchanged for a better policy (i.e., lower premiums) to help provide for beneficiaries at no estate tax cost, to make sure the contributions to the ILIT have no gift tax issues and to be sure the ILIT is drafted properly. Further we never know how Congress will act in the future as far as the estate tax exemption.
Also don’t forget under Chapter 736 annual accountings or waivers are required for ILITs. However review Fla. Stat. 736.0902 for a relief from the prudent investor rule for trustees.
ADVICE: The use of an ILIT will not disappear. In the right circumstances they are very good leveraging tools and for the very wealthy an ILIT is an indispensable tool. A client’s current ILIT should be reviewed to ascertain how it works in their current estate plan. You can discuss with your client whether they want to keep them, create a new trust to purchase them, exchange a life insurance policy, etc. You should also retain a knowledgeable insurance adviser to help you with the process.
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