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.