Advanced Planning

Advanced Planning is also available for individuals and married couples who have greater-than-average needs in Estate Planning. Some examples include second marriages with planning to ensure that children from the first marriage are adequately provided for, provision for children or spouses who are under a disability, and transfer of businesses to the next generation.

Pricing varies based on the complexity of the situation.

Irrevocable Live Insurance Trust (ILIT) is a trust. that owns your life insurance policy. You establish an ILIT if you don’t want to own the policy yourself. The trust pays the policy premiums and passes along the death benefit to your designated beneficiaries when you die. Why would you want a trust own your life insurance policy? Because if you keep the policy in your own name, the death benefit (that’s the amount the policy pays to your beneficiaries when you die) will be counted as an asset of your taxable estate and may be subject to federal estate taxes. “What?” you might ask. “Aren’t life insurance benefits always tax-free?” Actually, a death benefit is only income free. When you die, your beneficiaries won’t have to pay any income tax on your death benefit. But your death benefit could still be eaten away by estate taxes (unless the death benefit goes solely to your spouse assets always pass between spouses estate-tax-free).

On the other hand, if your life insurance policy is owned by an ILIT:

  • The death benefit won’t be subject to estate taxes.
  • The value of the policy won’t bump your estate up to a taxable level if your estate isn’t there without the policy.
  • You can decrease your taxable estate by gifting money to the ILIT.
  • Because the ILIT won’t pass through probate, its provisions are confidential.

If your estate (including your life insurance policy) is at a taxable level, an ILIT might be for you. Not only could you decrease your taxable estate by making gifts to the ILIT, but your heirs could use the money from the death benefit to pay off estate taxes.

Currently if your estate (including your life insurance) is worth more than $5.34  million, it’s subject to estate taxes.

Because the legal and tax regulations surrounding ILITs are so strict, you should have a knowledgeable estate-planning lawyer set up an ILIT. A financial consultant can also give you information on irrevocable trusts and help you figure out a smart, complete estate strategy one that’s tailor-made for you and your family.

Once you set up an ILIT and put a life insurance policy into it (either by transferring an existing policy into it or having the ILIT trustee open one), you’ll need to fund the ILIT. Here are some tips:

  • Give annual gifts. Each year, make a gift to the trust that equals your life insurance policy’s annual premium (so the trust can then pay the premium). You can apply your gift tax exemption to this amount.
  • Don’t be late. Make this gift at least 30 days before the annual premium is due so the trust can make the payment on time and the policy doesn’t lapse.

When you die, the trust will receive your life insurance death benefit and then pay it to your designated beneficiaries.

An irrevocable trust is exactly as it sounds irrevocable. You determine the terms of the trust when you set it up (picking which beneficiaries will receive your death benefit and so on), but you can’t change it after that.

Before you dash out to set one up, be aware that these things happen with an ILIT:

  • Your beneficiaries won’t budge. If you change your mind about who you want to receive your death benefit, you’re out of luck. The most you can do is stop making premium gifts to the trust so the policy lapses.
  • The money is out of your hands. Since you have no control over the trust, you won’t be able to borrow money from your policy or cash it out.
  • You’ll need to give it time. If you die within three years of putting a life insurance policy into an ILIT, the death benefit will be considered part of your taxable estate.
  • Transfers are taxable. The transfer of an existing life insurance policy to an ILIT is considered a taxable gift (although you could apply your gift tax credit if you haven’t already used it up). If the policy is term, the gift value is the current year’s premium. With a permanent policy, the gift value is the policy’s cash value when you transfer it.

Of course, “irrevocable” also has a plus side. If any of your beneficiaries are unhappy with their inheritance, they won’t be able to challenge the ILIT or have it revoked.

Now that you understand the issues, do you think an ILIT is right for you? Be sure to consult your tax adviser before making any final decisions. A financial consultant can also help you understand ILITs and help you create a smart, complete strategy for your unique estate.

Pricing varies based on the complexity of the situation.