Using an ILIT in Estate Planning


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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

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Using an ILIT in Estate Planning

  1. 1. By Ward J. Wilsey, JD, LLM The Wilsey Law Firm [email_address] Using an ILIT in Estate Planning
  2. 2. Circular 230 Warning <ul><li>Pursuant 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. </li></ul>2007 (c)
  3. 3. Life Insurance in Estate Planning <ul><li>Providing Liquidity </li></ul><ul><li>Replace Income </li></ul><ul><li>Increase the Family Estate </li></ul><ul><li>Making Charitable Contributions </li></ul><ul><li>Allowing the Zero-Tax Estate Plan </li></ul><ul><li>Business Purposes </li></ul><ul><ul><li>Buy Sell </li></ul></ul><ul><ul><li>Split Dollar </li></ul></ul><ul><ul><li>Key Man </li></ul></ul>
  4. 4. Estate Tax Considerations <ul><li>IRC 2042 </li></ul><ul><ul><li>A Decedent’s estate includes proceeds of life insurance policies that are: </li></ul></ul><ul><ul><ul><li>Receivable by the executor as insurance on the life of the decedent; or </li></ul></ul></ul><ul><ul><ul><li>Receivable 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)) </li></ul></ul></ul><ul><ul><ul><ul><li>Change beneficiary </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Surrender or cancel </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assign the Policy </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Revoke an assignment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Pledge the policy </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Obtain a loan guaranteed by the surrender value </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Miscellaneous </li></ul></ul></ul></ul>
  5. 5. Purpose of ILIT <ul><li>Keep Life Insurance proceeds out of the insured’s taxable estate to avoid estate taxes </li></ul><ul><li>Be a vehicle for making easy transfers for premium payments without gift tax </li></ul>
  6. 6. Candidates for an ILIT <ul><li>Any client whose taxable estate, including the proceeds of any current or proposed life insurance policy, is greater than the estate tax exemption </li></ul><ul><ul><li>Or if appreciation in their estate could push them above the exemption </li></ul></ul><ul><li>Take the Marital Deduction into consideration </li></ul><ul><li>If 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. </li></ul>
  7. 7. How an ILIT pays estate taxes <ul><li>ILITs do not pay estate taxes directly </li></ul><ul><li>ILITs must purchase assets from the decedent’s estate or Revocable Living Trust in order to provide liquidity </li></ul><ul><ul><li>Or loan can be made with adequate security (IRC 2042) </li></ul></ul><ul><li>As such, great care should be put into the ILIT to make sure distribution provisions are correct </li></ul><ul><ul><li>A great deal of the Grantor’s estate will pass via the ILIT </li></ul></ul>
  8. 8. Transfers within 3 years of Death <ul><li>Usually not includible in the decedent’s estate </li></ul><ul><li>Life Insurance is includible under IRC 2042 </li></ul><ul><li>Make sure you address this when transferring policies into an ILIT </li></ul><ul><ul><li>You can just sell the policy for Fair Market Value </li></ul></ul><ul><ul><ul><li>Interpolated Terminal Reserve Value </li></ul></ul></ul>
  9. 9. Irrevocable Life Insurance Trusts <ul><li>Irrevocable </li></ul><ul><li>Insured cannot be trustee </li></ul><ul><li>Owner of Life Insurance </li></ul><ul><ul><li>Should fill out all applications </li></ul></ul><ul><ul><ul><li>Or else you should assume 3 year rule applies </li></ul></ul></ul>
  10. 10. Trustees <ul><li>Single Life </li></ul><ul><ul><li>Can be spouse </li></ul></ul><ul><ul><ul><li>Family Gifting Trust </li></ul></ul></ul><ul><ul><ul><ul><li>Watch the reciprocal trust doctrine </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A must for most premium finance arrangements where there is a possibility of a sale </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Separate Property Agreement required </li></ul></ul></ul></ul><ul><li>Survivor Policy </li></ul><ul><ul><li>Must be another party </li></ul></ul>
  11. 11. Paying the Premiums <ul><li>You should try to avoid gift taxes when transferring money to pay the premiums </li></ul><ul><li>Solutions </li></ul><ul><ul><li>Use lifetime exclusion </li></ul></ul><ul><ul><ul><li>$1,000,000 per person cumulative </li></ul></ul></ul><ul><ul><li>Use annual gifts </li></ul></ul><ul><ul><ul><li>$12,000 to as many different people as you wish </li></ul></ul></ul><ul><ul><li>Other methods </li></ul></ul><ul><ul><ul><li>Sale for Promissory Note </li></ul></ul></ul><ul><ul><ul><li>ILIT is beneficiary of GRAT </li></ul></ul></ul>
  12. 12. Annual Gifting <ul><li>A gift will be “taxable”, and count towards the grantor’s Lifetime Gift Tax Exemption, unless it qualifies for the annual gift tax exclusion </li></ul><ul><ul><li>IRC 2503(b) </li></ul></ul><ul><li>Will only qualify if “present interest in property” </li></ul><ul><ul><li>IRC 2503(b); Treasury Reg. 25.2503-3 </li></ul></ul><ul><li>Beneficiary must have a “Crummey Power” </li></ul><ul><ul><li>Crummey v. Commissioner 397 F. 2d 82 (1968) </li></ul></ul><ul><ul><li>Annual Crummey Notices </li></ul></ul><ul><ul><ul><li>Sent to beneficiaries </li></ul></ul></ul><ul><ul><ul><li>Notifying of withdrawal rights </li></ul></ul></ul><ul><ul><ul><li>Failure to deliver Crummey Letters may disqualify gifts for annual gift tax exclusion </li></ul></ul></ul><ul><ul><ul><ul><li>Affidavit </li></ul></ul></ul></ul>
  13. 13. Warning About Crummey Powers <ul><li>If Crummey beneficiary fails to exercise right to take gift, it may be a gift on their part </li></ul><ul><ul><li>To the extent the gift is over $5,000 or 5% of the trust principal </li></ul></ul><ul><li>Client’s ILIT should contain “Hanging Crummey Powers” </li></ul><ul><ul><li>Gives them the right to withdraw funds subject to this 5 and 5 rule indefinitely </li></ul></ul><ul><li>Something to be aware of, but is ultimately a drafting issue. </li></ul>
  14. 14. Income Tax Considerations <ul><li>Most insurance policies do not cause taxable income </li></ul><ul><li>Grantor Trust v. Non-Grantor Trust </li></ul><ul><ul><li>Trust should at least allow Grantor status </li></ul></ul><ul><ul><ul><li>In case of need for sale of policy </li></ul></ul></ul>
  15. 15. Generation Skipping Transfer Taxes <ul><li>Annual Exclusion is generally non exempt from Generation Skipping Transfer taxes unless </li></ul><ul><ul><li>Trust distributed for one beneficiary during beneficiaries lifetime </li></ul></ul><ul><ul><li>Assets must be includible in that beneficiaries estate </li></ul></ul><ul><ul><ul><li>Usually not the case </li></ul></ul></ul><ul><li>GST Exemption will be allocated to gifts unless opted out, if trust is a GST Trust </li></ul><ul><ul><li>But counts toward exemption </li></ul></ul>
  16. 16. ILIT Summary <ul><li>Make sure client’s are aware of need for an ILIT </li></ul><ul><li>Make sure ILIT, not the client, purchases the Policy </li></ul><ul><li>Make sure the client is aware of gifting requirements </li></ul><ul><li>Make sure the client’ ILIT encompasses their entire estate plan, as many assets will be transferring via the ILIT, not the RLT </li></ul>
  17. 17. Ward J. Wilsey, JD, LLM The Wilsey Law Firm [email_address] Questions???