Irrevocable Life Insurance Trusts (ILIT)
An Irrevocable Life Insurance Trust (“ILIT”) is a useful (almost indispensable) estate tax reduction tool for estates that will most likely be subject to estate tax ($5,250,000 for a single person and $10,500,000 for a married couple in 2013). If done correctly, it allows life insurance that would normally be fully includible in your estate to pass completely outside of your taxable estate.
Is it a gift when a make the transfer?
Yes, it is gift, but unless the premiums are very large it will not be a taxable gift. Normally, this type of gift (a “future interest”) does not qualify for the $14,000 per beneficiary annual exclusion, however, there is special exception (called the “Crummey” notice) that allows the annual exclusion if the beneficiary is given an annual withdrawal right of the gift to the trust. If the beneficiary realizes that withdrawal would not be in his or her best interest, the withdrawal right expires (lapses) after the withdrawal period. The process is complex, technical and almost incomprehensible. Congress may eventually eliminate this strategy some day, but for now it works.
Can I transfer an existing policy to trust or just new policies that I purchase?
It may be accomplished either way. However, if you transfer an existing policy to an ILIT, the life insurance will be pulled back into your taxable estate if you die within 3 years of the transfer. On the other hand, if you set up the trust properly and have the trustee purchase the life insurance, it will be immediately and permanently removed from your estate.
The Law Offices of Jeffrey R. Gottlieb, LLC, provides comprehensive ILIT solutions, including:
- Custom-made trust design and drafting
- Trust execution assistance
- Application for Federal Tax ID Number
- Application by trustee for insurance
- Supervision of initial gift
- Opening of trustee’s bank account
- Preparation and delivery of notices of right to withdrawal to beneficiaries
- Supervision of first gift to trust
- Supervision of trustee’s first payment of premium
Please call us at (847) 991-2250 if you may be interested in setting up an ILIT for your life insurance.
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To schedule a free initial consultation, please call us at (847) 991-2250 or contact us online.