Irrevocable Life Insurance Trust

Minimize (or eliminate) Estate Taxes with the ILIT

How it works:

  • First you create an ILIT and then you make a gift to the ILIT, so it can purchase new insurance.
  • Alternatively, you can transfer the ownership of an existing life insurance policy into the ILIT.  (If an existing policy is transferred, any death benefit remains part of the estate for 3 years.)
  • You then make periodic gifts to the trust to pay the life insurance premiums. The use of “Crummy powers” allows you to make large, tax-free gifts to the ILIT.
  • Eventually, the death benefits from the life insurance will be used to pay the anticipated estate taxes or to fund other elements of the Estate Plan.

Key advantages -

  • Life insurance provides liquidity for an estate, in order to preserve family real estate or other “illiquid” assets, so that they will not need to be sold by the heirs.
  • The ILIT is useful in planning for one heir to receive a family business, while the other heirs will be treated fairly through the use of compensating cash inheritances.

Other advantages -

  • Life insurance can provide money for business buyouts.
  • It allows for substantial gifts to charities without “disinheriting” the heirs.
  • It can be used to fund a Special Needs Trust for a disabled child, while passing other assets to the nondisabled children.

Still other advantages -

  • Removes life insurance benefits from an estate, eliminating unnecessary taxes.
  • Protects and preserves non-liquid assets by assuring that money is available for estate taxes and other costs.
  • Allows for the equal treatment of heirs.
  • Leverages the use of the estate dollars to meet planning goals.

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