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This is a real basic presentations about the application of an Irrevocable Life Insurance Trust to estate planning. If you would like a copy of the slides with my in depth audio presentation, please email me at [email protected]
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By Ward J. Wilsey, JD, LLMThe Wilsey Law Firmwww.wilseylaw.com
Using an ILIT in Estate Planning
Circular 230 WarningPursuant to the rules of professional conduct set
forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing
contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it
cannot be used by any taxpayer for such purpose. No one, without our express prior written
permission, may use or refer to any tax advice in this communication in promoting, marketing, or
recommending a partnership or other entity, investment plan or arrangement to any other party.
2007 (c)
Life Insurance in Estate PlanningProviding LiquidityReplace IncomeIncrease the Family EstateMaking Charitable ContributionsAllowing the Zero-Tax Estate PlanBusiness Purposes
Buy SellSplit DollarKey Man
Estate Tax ConsiderationsIRC 2042
A Decedent’s estate includes proceeds of life insurance policies that are:Receivable by the executor as insurance on the life of
the decedent; orReceivable by other beneficiaries as insurance on the life
of the decedent where the decedent possessed incidents of ownership at death (See Treasury Reg. 20.2042-1(c)(2)) Change beneficiary Surrender or cancel Assign the Policy Revoke an assignment Pledge the policy Obtain a loan guaranteed by the surrender value Miscellaneous
Purpose of ILITKeep Life Insurance proceeds out of the
insured’s taxable estate to avoid estate taxes
Be a vehicle for making easy transfers for premium payments without gift tax
Candidates for an ILITAny client whose taxable estate, including
the proceeds of any current or proposed life insurance policy, is greater than the estate tax exemptionOr if appreciation in their estate could push
them above the exemptionTake the Marital Deduction into considerationIf Client does not choose to do an ILIT, you
still want to make sure the client’s proceeds are payable to the Revocable Living Trust.
How an ILIT pays estate taxesILITs do not pay estate taxes directlyILITs must purchase assets from the
decedent’s estate or Revocable Living Trust in order to provide liquidityOr loan can be made with adequate security
(IRC 2042)As such, great care should be put into the
ILIT to make sure distribution provisions are correctA great deal of the Grantor’s estate will pass
via the ILIT
Transfers within 3 years of DeathUsually not includible in the decedent’s
estateLife Insurance is includible under IRC 2042Make sure you address this when
transferring policies into an ILITYou can just sell the policy for Fair Market
ValueInterpolated Terminal Reserve Value
Irrevocable Life Insurance TrustsIrrevocableInsured cannot be trusteeOwner of Life Insurance
Should fill out all applicationsOr else you should assume 3 year rule applies
TrusteesSingle Life
Can be spouseFamily Gifting Trust
Watch the reciprocal trust doctrineA must for most premium finance arrangements
where there is a possibility of a saleSeparate Property Agreement required
Survivor PolicyMust be another party
Paying the PremiumsYou should try to avoid gift taxes when
transferring money to pay the premiumsSolutions
Use lifetime exclusion $1,000,000 per person cumulative
Use annual gifts$12,000 to as many different people as you wish
Other methodsSale for Promissory NoteILIT is beneficiary of GRAT
Annual GiftingA gift will be “taxable”, and count towards the
grantor’s Lifetime Gift Tax Exemption, unless it qualifies for the annual gift tax exclusionIRC 2503(b)
Will only qualify if “present interest in property”IRC 2503(b); Treasury Reg. 25.2503-3
Beneficiary must have a “Crummey Power”Crummey v. Commissioner 397 F. 2d 82 (1968)Annual Crummey Notices
Sent to beneficiariesNotifying of withdrawal rightsFailure to deliver Crummey Letters may disqualify gifts
for annual gift tax exclusionAffidavit
Warning About Crummey PowersIf Crummey beneficiary fails to exercise
right to take gift, it may be a gift on their partTo the extent the gift is over $5,000 or 5% of
the trust principalClient’s ILIT should contain “Hanging
Crummey Powers”Gives them the right to withdraw funds
subject to this 5 and 5 rule indefinitelySomething to be aware of, but is ultimately
a drafting issue.
Income Tax ConsiderationsMost insurance policies do not cause
taxable incomeGrantor Trust v. Non-Grantor Trust
Trust should at least allow Grantor statusIn case of need for sale of policy
Generation Skipping Transfer TaxesAnnual Exclusion is generally non exempt
from Generation Skipping Transfer taxes unlessTrust distributed for one beneficiary during
beneficiaries lifetimeAssets must be includible in that
beneficiaries estateUsually not the case
GST Exemption will be allocated to gifts unless opted out, if trust is a GST TrustBut counts toward exemption
ILIT SummaryMake sure client’s are aware of need for an
ILITMake sure ILIT, not the client, purchases
the PolicyMake sure the client is aware of gifting
requirementsMake sure the client’ ILIT encompasses
their entire estate plan, as many assets will be transferring via the ILIT, not the RLT
