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ILITs Revisited

An ILIT is an irrevocable life insurance trust. The purpose of an ILIT is to cause life insurance death benefits to be excluded from a decedent’s taxable estate. With the usual life insurance policy owned by a decedent, the death benefits are part of the decedent’s estate and subject to estate taxes because the decedent has the power to change the beneficiary. In an ILIT, the life insurance is owned by the ILIT and therefore the death benefits are not subject to estate tax.

ILITs have been an important tool in estate planning either to remove wealth from a decedent’s estate thereby reducing estate taxes and in situations where a decedent wants to provide cash to his beneficiaries to pay estate taxes.

With an ILIT, the individual or married couple creates an irrevocable trust and funds the trust with an insurance policy. If certain requirements are met, the proceeds from the life insurance policy upon death are removed from the decedent’s taxable estate. The decedent during his life can make a yearly tax free gift to cover the cost of the insurance premium. One of the differences between an ILIT and a revocable living trust is that the ILIT is irrevocable and the trustee cannot be the trustor/decedent or the beneficiaries. The trustee must be independent, usually a trusted family friend, private professional fiduciary, or a financial institution.

The new 2010 Tax Act which now is in effect until the end of 2012, provides for a $5 million estate tax exemption. $5 million is the highest estate tax exemption this country has seen. This means that the beneficiaries of a single person whose estate is less than $5 million, will not have to pay estate taxes. For a married couple this means that for a couple whose wealth does not exceed $10 million, no estate taxes will be due. In years past when the exemption was $1 million, for example, ILITs made a great deal of sense but with the exemption now at $5 million, do ILITs still make sense?

If you are an individual who is going to have a taxable estate even if the exemption remains at $5 million, then an ILIT may still be a good plan. On the other hand, if your estate is presently not likely to be subject to estate taxes upon your death, maybe the next two years will determine whether an ILIT is an estate planning tool you should consider. For now, the best approach may be a wait and see approach.

If you have questions about whether an ILIT should be part of your estate plan, call the estate planning lawyers at Scott C. Soady, A Professional Corporation. We would be happy to answer any questions about ILITs or other estate planning questions. Your initial in-office consultation is always complimentary.

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