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However, if Congress takes no action, the current lifetime exemption limits are set to sunrise in 2025, reverting back to $5 million per person (adjusted for inflation). Many are calling for even stricter limits—advocating for a restoration of 2009 estate and gift tax levels: $3.5 million per person for the estate tax; $1 million for the gift tax; and a top tax rate increase to 45%.
Considering this uncertainty, more individuals and families may want to explore the potential future benefits of including an ILIT as a fundamental component of their estate plans.
ILITs are trust structures that are established to purchase and own a life insurance policy on the grantor’s life. There are three legal parties to the trust:
Effectively, by creating an ILIT you’re separating the value of the assets your trust owns from the value of your taxable estate. The trustee (which can be a friend, relative, or professional independent trustee) coordinates the payment of premiums with the insurance provider to ensure the policy remains in force. When you die, the policy’s death benefit is then paid directly to your trust, which in turn distributes the proceeds to the trust’s beneficiaries.
The only major downside is that ILITs are irrevocable trusts. Whereas a revocable trust can be easily modified or terminated because the assets are still considered a personal asset, you relinquish control over assets when you gift them to an irrevocable trust. Therefore, the trust cannot be modified without the consent of the beneficiaries.
One of the most tax-efficient ways to pay the annual insurance policy premiums is to use your annual gift tax exclusion (currently $15,000 per year for each trust beneficiary) to fund the trust each year. Once the funds are received by the trust each year, your beneficiaries would receive a written notification (these are called “Crummey Notices”) allowing them the option to take those funds as a distribution. Understanding the purpose of the trust, they would then decline the withdrawal—making the funds available for the trustee to pay the required insurance premiums.
Alternatively, you could simply transfer an existing insurance policy to an ILIT. It’s important to note, however, that should you die within three years of transferring the policy to the trust, the IRS would require that any proceeds be included in your estate for estate tax purposes.
Aside from the tax-efficient transfer of wealth to your beneficiaries, there are two other important benefits of ILITs which may be of value based on your particular circumstances:
ILITs are powerful planning tools that may serve as an important wealth transfer mechanism in many well-crafted estate plans. They afford a multitude of potential benefits to your family, with few drawbacks aside from the irrevocable nature of the gift and the need to ensure you have the means to continue paying annual premiums to keep the insurance policy in force.
Talk to your Eagle Strategies Financial Advisor or get connected today.
Eagle Strategies LLC (Eagle) is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Eagle investment adviser representatives (IARs) act solely in their capacity as insurance agents of New York Life, its affiliates, or other unaffiliated insurance carriers when recommending insurance products and as registered representatives when recommending securities through NYLIFE Securities LLC (member FINRA/SIPC), an affiliated registered broker-dealer and licensed insurance agency. Eagle Strategies LLC and NYLIFE Securities LLC are New York Life Companies. Investment products are not guaranteed and may lose value. No tax or legal advice is provided by Eagle, its IARs or its affiliates.
12021 Estate Tax Rates, IRS.gov.