ILITs were designed to avoid taxes on life insurance payouts.
ILIT is an acronym for "irrevocable life insurance trusts."
Why would you need one?
If your life insurance is included in your estate - and your estate exceeds the applicable estate tax exemption - then any proceeds could be taxed up to 40%.
Not good.
Creating an ILIT to hold the title to your life insurance can enable you to avoid estate taxes on this payout.
Sounds great, right?
It can be.
Before you make the decision, you will need more information.
As a recent Motley Fool article titled “What's an Irrevocable Life Insurance Trust and Why Do I Need One?” points out, look before you leap,.
For the ILIT to accomplish its mission, the i's gotta be dotted and the t's gotta be crossed.
Here are a few issues to keep in mind.
How are payments made?
Insurance premium payments need to be paid by the trust.
This is done by funding the trust with money to pay the initial premiums.
Also, you also make ongoing future gifts to the trust to feed any ongoing premium payments.
In short though, you do not directly buy the insurance.
The trust purchases the insurance with the trust as the beneficiary.
Remember, an ILIT must avoid giving you “incidents or ownership.”
What are these?
“Incidents of ownership” are the management rights to the policy—including the ability to change beneficiaries, to alter how the payouts are distributed or to borrow against the policy.
Why is this important?
Keeping any of these rights defeats the purpose of the ILIT.
Your assets would be taxed as part of your estate.
Other trust provisions apply at your death.
What are the trustee responsibilities?
The trustee is responsible for giving notice to the trust beneficiaries each time a gift is made to the trust so such gifts qualify as a "present interest" under the annual gift exclusion rules.
By the way, the written notices are called "Crummey Letters"!
I kid you not.
Yes, this stuff gets complicated fast.
When can an ILIT be terminated?
When all the protective terms of the ILIT are satisfied, the trust can terminate, and final distributions are made to its recipients.
Are there potential issues with an ILIT?
Oh, yes.
The most common?
If the cost to continue the policy becomes too great, the trustee may have to surrender the trust or choose to borrow against the trust to fund it.
Neither is ideal.
To determine whether the costs are worth the rewards of an ILIT, work with an experienced estate planning attorney.
He or she can advise you on this tool and set up this complex trust if it appropriate for you unique circumstances.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: Motley Fool (August 24, 2016) “What's an Irrevocable Life Insurance Trust and Why Do I Need One?”
