I Want You to Stop Paying Taxes Irrevocable Life Insurance Trust (ILIT)

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Federal Estate Taxes Can Destroy Wealth

Year Federal Exemption Federal Estate Tax Rate 2007 $2.0 million 45% 2008 $2.0 million 45% 2009 $3.5 million 45% 2010 Estate Tax Repealed 0% 2011 $1.0 million 55%

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State Estate Taxes Can Destroy Wealth

Top State Estate State State Exemption Tax Rate 2009 Connecticut $2.0 million 16% Delaware $3.5 million 16% Illinois $2.0 million 16% Kansas $1.0 million 3% Maine $1.0 million 16% Maryland $1.0 million 16% Maine $1.0 million 16% Minnesota $1.0 million 16% New Jersey $675,000 16% New York $1.0 million 16%

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State Estate Taxes Can Destroy Wealth

Top State Estate State State Exemption Tax Rate 2009 North Carolina $3.5 million 16% Ohio $338,333 7% Oklahoma $3.0 million 10% Oregon $1.0 million 16% Rhode Island $675,000 16% Tennessee $1.0 million 9.5% Vermont $2.0 million 16% Washington D.C. $1.0 million 16% Washington $2.0 million 19%

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Beneficiaries of Life Insurance Do Not Pay Taxes, But…

Internal Revenue Code Section 101(a)(1) allows proceeds from life insurance to be excluded from taxation for beneficiaries.

But…

Internal Revenue Code Section 2042(1) includes the proceeds in the decedent's estate.

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Hypothetical Life Insurance without ILIT

Insured purchases $5.0 million of life insurance at an annual cost of $52,000.

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Life Insurance Proceeds of $5,000,000 without ILIT

Life Insurance Proceeds $5,000,000 Life Insurance Proceeds Included in Estate $5,000,000 Less Federal Estate Taxes at 45% Rate ($2,250,000) Less State Estate Taxes at 19% Rate ($950,000) Net Value $1,800,000

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The ILIT Removes the Proceeds from the Estate An Irrevocable Life Insurance Trust (ILIT) is a trust that owns a life insurance policy on an insured, instead of the insured owning the life insurance policy directly.

Internal Revenue Code Section 2042(2) allows life insurance proceeds inside of the ILIT to be excluded from the decedent's estate.

Assets outside of the estate are excluded from estate taxes.

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Life Insurance Premiums as Annual Gifts to ILIT

Annual Gifts to the ILIT to pay for the annual life insurance premiums do not count towards each person’s $1.0 million lifetime gift tax exemption. Life insurance premium payments reduce the estate. Life insurance provides tremendous leverage per named beneficiary, as $1 of premium buys significantly more than $1 of benefit.

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Hypothetical Life Insurance with ILIT

Insured has four children (beneficiaries) and establishes an ILIT, gifting the annual gift limit of $13,000 per beneficiary (to avoid utilizing any of their $1.0 million lifetime gift tax exemption). The ILIT is able to purchase $5.0 million of life insurance at an annual cost of $52,000 ($13,000 X 4).

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Life Insurance Proceeds of $5,000,000 with ILIT

Life Insurance Proceeds $5,000,000 Life Insurance Proceeds Included in Estate $0 Less Federal Estate Taxes at 45% Rate ($0) Less State Estate Taxes at 19% Rate ($0) Net Value $5,000,000

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Conclusions

Federal estate taxes can destroy wealth.

State estate taxes can destroy wealth.

Life insurance provides tremendous leverage, when comparing premiums to life insurance proceeds.

Life insurance proceeds inside of an Irrevocable Life Insurance Trust (ILIT) are exempt from estate taxes.

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Aaron Skloff, AIF, CFA, MBA Chief Executive Officer Skloff Financial Group

908.464.3060

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