Since Congress doubled the set estate tax equivalent exemption amount from $5,600,000 to $11,200,000 as of this year - many professional advisers have opined that the Irrevocable Life Insurance Trust or ILIT for short, is obsolete for most estate plans who don't have "Rockefeller" size estates.
But they are wrong. Having held an insurance license now for over 42 years and having sold millions and millions of dollars of life insurance during that time period I am not exempt from understanding the product and how it can be applied and used in an estate plan. I used the then Lieutenant Governor of Iowa as my legal source and sold a lot of Iowa farmers on the idea of having some extra money left for their families if they suddenly died. And not just for paying the assumed inheritance tax that has scared those Iowa farmers for many decades as land values started rising drastically in the 1970's.
I created our FSI Legacy ILIT Portfolio way back in the mid 90's, not letting changes in the estate tax laws remove the reason this estate planning tool is and remains a very valid instrument to provide tax free money to survivors when it is needed most. Obviously, when the estate owners die.
But now, the main purpose to use an ILIT in your estate plan is not to pay future estate death taxes. (though that could be a problem since the doubled amounts revert back January 1, 2026 or just a little over 6 years from now) The use of the ILIT in our modern world has a whole new need as families crumble from divorce, death, high health insurance costs, forced sales in partnerships, separate estate plans for children from a former marriage, lawsuits awards at record levels, mysterious disappearance, high tax rates, etc. etc. etc.
In other words, this world we live in has more risks to take away your hard earned estate either from you before you die or from your spouse or your children or grandchildren when you die. But there is a solution. The Tax-Free Death plan using life insurance. Now it is not the right forum to discuss the pros and cons from using term insurance over permanent universal life insurance with cash value. What is important is that you can "gift" the premium to your beneficiary of your policy once the ILIT is first set up to buy the policy. No IRS gift tax returns or reporting as long as you gift no more than the annual allowed exempt amount, currently $15,000 in 2018.
The beneficiary or beneficiaries in turn pay your annual premium keeping the ownership out of your estate from day one. End result? No inclusion in your estate of the policy face amount and no income tax on the death payout when you die. Not a single penny!
There are some rules to do this correctly and of course, we are aware of all of them and include all service forms and beneficiary letters in your custom printed ILIT Trust Portfolio. We can also assist you as a life and health insurance licensed Arizona corporation and individual (M.D. Anderson) so the process is seamless by just ONE adviser.
In summary, there are three reasons to consider this important estate planning tool in your estate plan:
1. They become an excellent way to protect assets now and for future generations. Since the policy and any cash value (if a permanent policy) is "outside" your estate, a divorce or lawsuit normally can't touch the proceeds.
2. Reinstatement of a lower federal estate tax exemption equivalent could happen at the drop of a hat. (After an election that changed control). This could happen yet this year! Any money needed to pay the federal estate tax due in just 9 months could be used from the proceeds of the policy upon your death.
3. People like the thought of leaving a legacy. Any premium you gift to a beneficiary via your ILIT will be money removed from your estate and magnified many fold. Regardless of a set premium on term (lower to start) or permanent life insurance (higher to start but lower cost when you get really old), you can create a $1,000,000 tax free* death estate for your beneficiary (heir) with just a few hundred to a few thousand dollars of premium paid as annual "gifts" each year on a term policy. Where else can you do that? The simple answer is only with life insurance outside of gambling for a million dollar lottery win. (Which will take about 1/2 since it is taxable)
* based on current IRS rules that have never changed to date.
There is another reason to buy a large life insurance policy with an ILIT as owner promoted by some authors and frankly, this idea has great credibility. And it is simple to understand. Budget for and set aside all the money needed to pay annual premiums on a life insurance policy for your children. (Permanent Insurance is required here). Then create your ILIT and apply for the same amount of coverage that you expect your estate to be worth when you die. (you can normally buy less or more depending on your financial status)
THEN SPEND ALL YOUR MONEY NOT GOING TO ANNUAL PREMIUMS (WE CAN DO A PRE-PAY PROGRAM WITH AN ANNUITY TOO SO PREMIUMS CAN STOP IN THE FUTURE) ON WHATEVER YOU WANT TO SPEND THE MONEY ON. IN OTHER WORDS -- SPEND YOUR ESTATE DOWN TO ZERO AT DEATH AND STILL DIE WITH THE SAME SIZE ESTATE BEFORE YOU DID YOUR ESTATE SPEND DOWN WHEN ALIVE!
I don't know about you. But I am now considering that last option seriously as I write this blog entry...
PS: Most readers - you are insurable. Maybe not at standard rates. But most are insurable even at advanced ages.