Maximizing Your Estate Plan: Leveraging Irrevocable Life Insurance Trusts (ILITs)
One of the most powerful tools in our estate planning arsenal is the Irrevocable Life Insurance Trust (ILIT). With the upcoming changes to estate tax exemptions, now is the perfect time to consider how an ILIT can benefit you and your loved ones.
What is an ILIT?
An ILIT is a specialized trust designed to hold a life insurance policy. Once established, the trust owns the policy, and you, as the grantor, relinquish control over the assets within it. This strategic move removes the policy's cash value and death benefit from your taxable estate, providing significant tax advantages and ensuring your wealth is efficiently transferred to your beneficiaries.
Key Benefits of Using an ILIT
1. Minimizing Estate Taxes
With the estate tax exemption set to be cut nearly in half in 2026, from $13.61 million to around $7 million, utilizing an ILIT becomes even more crucial. By transferring ownership of your life insurance policy to an ILIT, your life insurance death benefit is no longer part of your taxable estate (taxed at up to a 40% rate). This not only reduces the estate tax burden but also ensures that the life insurance proceeds provide liquidity to cover any remaining estate taxes without inflating your estate's value.
2. Minimizing Gift Taxes
A properly drafted ILIT allows you to make annual contributions to cover life insurance premiums without triggering gift taxes, as long as these contributions fall within the annual gift tax exclusion amounts. In 2024, this exclusion is $18,000 per individual or $36,000 for married couples, per beneficiary. Depending on the number of beneficiaries named in your ILIT you could gift substantial amounts to the ILIT annually, leveraging the gift tax exclusion and preserving your lifetime exemption, currently set at $13.61 million per individual.
3. Eligibility for Government Benefits-Special Needs Children and Grandchildren
By removing the assets from your direct ownership, an ILIT can help you or your beneficiaries qualify for means-tested government benefits, such as Social Security or Medicaid. This is particularly beneficial for special needs individuals, as it allows them to receive necessary government assistance without being disqualified due to asset ownership. ** Medicaid eligibility is a complicated process and may vary by state law. Care must be taken to ensure any trust is properly drafted to mee the client’s needs.
4. Asset Protection
Once the policy is transferred to an ILIT, it is protected from creditors and other legal claims. This is especially important in scenarios like divorce, where the trust ensures that your beneficiaries receive the intended assets without them becoming part of legal disputes.
5. Incentive Clauses
ILITs can include incentive clauses that set specific conditions or milestones beneficiaries must meet to receive distributions. This feature allows you to guide beneficiary behavior, ensuring that the wealth is used responsibly. Common conditions might include graduating from college, purchasing a home, or achieving certain personal or professional milestones.
6. Legacy Planning
ILITs, especially dynasty trusts, help in long-term legacy planning. They can be structured to avoid generation skipping transfer taxes (GSTT), which apply to transfers to beneficiaries two or more generations below the grantor. By allocating assets towards a GSTT exemption, you can ensure that your wealth benefits future generations while working to minimize tax obligations.
Types of ILITs
Depending on your specific needs, various types of ILITs can be established:
• Spousal Lifetime Access Trust (SLAT): Allows your spouse to access income and principal while keeping the assets outside the taxable estate.
• Special Needs Trust: Provides for individuals with disabilities, ensuring they receive the necessary care and maintain eligibility for government benefits.
• Dynasty Trust: Benefits multiple generations, preserving wealth over a long period, potentially hundreds of years, depending on state laws.
Considerations and Next Steps
While ILITs offer numerous advantages, they come with some considerations. While ILIT’s are “irrevocable”, with proper planning additional flexibility can be drafted into these trusts. Additionally, choosing a reliable trustee is crucial, as they will manage the trust's assets and ensure compliance with its terms.
Please reach out our team at 561-361-8140 or lew@lawlessedwardswarren.com to discuss how a properly drafted and funded ILIT might make sense as part of your estate plan.
ACKNOWLEDGEMENT: Representatives of AIC/AAS do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Representatives offer products and services using the following business names: Lawless, Edwards & Warren – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | Ameritas Advisory Services, LLC (AAS) – investment advisory services. AIC and AAS are not affiliated with Lawless, Edwards, & Warren.