The Tax-Free Estate Planning Benefits of an Irrevocable Life Insurance Trust (ILIT)

With a likely change to Estate Tax provisions coming from Congress, the tax-free benefits of an Irrevocable Life Insurance Trust (ILIT) are needed now more than ever. Experienced financial advisor Cary Stamp explains how to use an ILIT, and why it's a crucial tool.
TRANSCRIPT:
I want to talk about what's going on in the estate tax world today and a strategy that we use all the time, it's very easy, that helps our clients create significant wealth for their beneficiaries, completely tax free. It's called an Irrevocable Life Insurance Trust. We simply call it an ILIT. What is it?
An Irrevocable Life Insurance Trust is an entity that is established simply for the purpose of owning a life insurance policy, either on one life or on two lives. It can be on a husband and wife, it could be on the husband or it could be on the wife. But this trust has what we call a grantor. That's the person that says, I want to establish trust and I want to pay the premiums for the trust every year. The grantor then purchases an insurance policy from an insurance company and puts it into this trust. The trust becomes the owner.
The trust has a person called the trustee, which is never the grantor. It's always somebody else so that it's not pulled into the grantors estate. But the trustee could be the grantor's wife or the grantor's child or an independent trust company. You need to talk to your attorney to make sure that you do this properly. I'm an accredited estate planner, but I will give you the disclaimer that I'm not a lawyer.
Now, this policy inside of this trust has a beneficiary and the beneficiary is almost always the trust. So the trust becomes the owner of the policy through the trustee and the beneficiary of the policy. At some point, the trust will pay the policy proceeds out to some other beneficiaries, which in most cases is likely your children or your grandchildren. So why do we want to do this?
Why would you want to go through this whole arrangement and put this policy inside of a life insurance trust? Three primary reasons. Number one, you might have a taxable estate. In this environment, the estate tax exemption is going down and if you do have a taxable estate, this is an asset that nobody has to pay any estate tax on. Why? Because you have completely given it away, it's not yours, and the government cannot tax you on something that you don't own. That's number one. Oh, and this entire policy benefit is both income tax free and estate tax free, in this scenario. It's really cool.
Secondly, is you might want some liquidity. Let's say that you own a significant business, you own a significant farm, or you've got an asset that is completely illiquid. Your family may owe an estate tax and you might want to have some cash funds available to be able to pay that tax. A life insurance trust can help with that.
And the third reason we see this strategy implemented a lot is because you may want to equalize an estate. Let's say you do run a fairly significant business and you've brought one child into the business, say it's your daughter, and she runs the day to day operations of the business. And when you pass away, you want your daughter to have and control the entire business. But you have two other sons and those two other sons are a doctor and a lawyer, and they want absolutely nothing to do with the business and your daughter doesn't want to be their partner. A life insurance trust can create the cash for your daughter to be able to buy out her brothers and own the business entirely on her own.
It's an excellent liquidity and estate planning mechanism that passes to your beneficiaries income tax free and estate tax free. I'm Cary Stamp, if you'd like more information, please feel free to give us a call.