Friday, February 11, 2011

Irrevocable Life Insurance Trusts: The Benefits*

In our last issue, we mentioned that if life insurance is not owned correctly or if premiums are not paid in the most tax-efficient manner, gift and estate taxes can potentially reduce the benefits of life insurance policies by more than half.

An irrevocable life insurance trust (generally referred to as an "ILIT"), potentially protects the value of life insurance policies in several ways:
  • No Gift Taxes. Allows premium payments to qualify for the $13,000 annual gift tax exclusion.
  • No Estate Taxes. It avoids a federal estate tax of up to 35% (2011) on life insurance proceeds on the death of the insured person(s). (The actual percentage will depend on what year the insured dies.)
  • No Generation-Skipping Transfer Taxes. With proper planning, it can shelter those proceeds from estate taxes for many generations while also avoiding the generation-skipping transfer tax when its assets pass from generation to generation.
  • Continued Control. By including explicit instructions to the trustees regarding future beneficiaries, it permits a trustmaker to make gifts with strings attached.
  • Protection from Creditors and Predators. Assets of the irrevocable life insurance trust will not be subject to the claims of your creditors or your beneficiaries' creditors, as long as the assets remain in the trust.
  • Insure Liquidity to Pay Debts and Estate Taxes. By permitting the trustees of the ILIT to purchase assets from the taxable estate or to loan trust principal to the estate.
  • Minimize Federal Gift & Estate Taxes. The principal of the irrevocable life insurance trust, including insurance proceeds added to it upon death, will be free of federal gift and estate taxes.
  • Minimize Income Taxes. Life insurance proceeds will be paid to the irrevocable life insurance trust free of income taxes.
  • Avoid Generation-Skipping Transfer Taxes. If the client and the representatives of the estate make proper elections on gift and estate tax returns, all assets of the irrevocable life insurance trusts will be able to pass from generation to generation, free of both estate and generation-skipping transfer taxes.  This will enable the client's family to build wealth in the trust, free of all forms of transfer taxes, for generations.
ILITS obviously have many benefits.  However, in our next issue, we'll discuss planning pitfalls to avoid when working with irrevocable life insurance trusts.

*Adapted from the Planning Partners Press.

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