Using an Irrevocable Life Insurance Trust (ILIT) As An Estate Planning Tool
Just had a new client in the office for some planning. As part of his asset picture, he had a $1 M life insurance policy he owned with his four kids as the beneficiaries. As I explained the potential estate tax implications based upon his asset picture, his eyes widened as I explained that there would be a tax due the State of Connecticut on his estate because he was over the $2 M threshold. He then insisted that his estate was actually only worth $1.5 M and thus he was not over the threshold. I then further explained that his estate was actually worth $2.5 M -- $1.5 M in real estate, stocks, etc. and $1 M from the death benefit from the life insurance policy.
I see this scenario a lot in my practice. People who ordinarily would not have to worry about estate taxes suddenly realize that because of life insurance policies, they are now over the Connecticut exemption. All of this can very easily be avoided, however. Instead of the client owning the life insurance policy, the policy should be owned by an Irrevocable Life Insurance Trust (ILIT). The beneficiaries can still be listed in the Trust Agreement as they would on the Beneficiary Designation Form for the policy. The Trust would make the premium payments, by the client making a gift to the Trust every year for the premium payments. Provided the Trust is drafted and administered properly -- the client has no ownership interest and the beneficiaries have a Crummey power (I won't make your eyes gloss over by explaining that), then the death benefit to the Trust will not be a part of the client's estate and no estate tax will be due.
Anyone with a life insurance policy of $1 M or more should have an ILIT. Why? Well, because with other assets such as real estate, stocks, etc. coupled with a life insurance policy, one can very quickly be pushed beyond the $2 M Connecticut exemption. And as I've blogged before, if your estate has a value of $2,000,001 your estate will owe $101,700 which is $101,700 less than your beneficiaries will get. You can get an ILIT drawn up for a lot less than that. So unless I'm missing something . . . it's a no brain-er!
