Estate Planning

An irrevocable life insurance trust (ILIT) enables you to pass insurance proceeds to your heirs estates tax-free. It cannot be amended, revoked, or altered by the grantor once it’s created. The assets in the trust are not included in the grantor’s estate. The Trustee may buy assets or lend money to the estate. 

The grantor makes annual gifts or a simple gift to pay the life insurance premiums. The grantor gives each beneficiary Crummey withdrawal power, which is the ability to withdraw the grantor’s gift to the trust within a prescribed time period, often between 30 and 60 days each year.

Tax Considerations

• The annual gift tax exclusion allows an individual to gift up to $14,000 annually per beneficiary free of gift tax. 
• Married couples can give $28,000 annually per beneficiary.

Advantages

• Insurance premiums are discounted compared to liquidating assets to pay taxes.
• An ILIT can provide the estate with liquidity for taxes.
• Life Insurance proceeds are excluded from the grantor’s taxable estate.
• ILIT avoids probate and maintains confidentiality.

Disadvantages

• The grantor forgoes complete control over the trust assets. 
• He or she cannot access the assets within the trust, such as the cash values of the life policy.
• The grantor loses the ability to alter, amend, revoke, or terminate the trust. 
• Policy proceeds may be included in the estate if death occurs within three years of the transfer of an existing policy to the trust.

How to implement

• An attorney drafts the trust documents.
• The trustee procures a trust tax ID number, if required.
• The grantor makes annual or lump-sum gifts to the trustee to pay life insurance premiums.
• The trustee applies for insurance on the life of the grantor and/or spouse. The trust is the owner and beneficiary of the life insurance policy. 
• The trustee notifies beneficiaries of their withdrawal rights via letter. 
• The trustee sends the insurance company the premium after the appropriate withdrawal period.