How Irrevocable Life Insurance Trust Can Fit into Your Estate Plan

At WrapManager, our focus is on helping you build an investment plan that can provide for you and your family—hopefully for generations to come.

That means part of our work focuses on estate planning, and making sure our clients are thinking about what strategies are needed to plan for the distant future.

For 2016, if your value of your estate is less than $5,545,000, then your estate tax planning process may consist of mostly fundamental estate planning—having a will, making sure your beneficiaries are in order, and maybe setting up trusts so you can control how your assets are distributed after death. WrapManager has put together this estate planning guide to help you get started.¹

If your estate exceeds that amount, then it means your heirs may be subject to a 40% estate or inheritance tax. The question in that case becomes, who is going to pay the tax and where is the money going to come from? An irrevocable life insurance trust may be a good answer.

How an Irrevocable Life Insurance Trust Works

An Irrevocable Life Insurance Trust (ILIT) basically works like this:²

• The person doing the estate planning (called the grantor in this case) sets up an irrevocable trust.
• The irrevocable trust then purchases a life insurance policy on the grantor, usually a permanent life insurance plan like whole life or universal life.
• Generally, the grantor can make gifts to the ILIT every year ($14,000 annual exemption) to pay the premium on the life insurance.
• Once the grantor passes away, the death benefit is payable and the assets in the ILIT would generally flow to the beneficiaries of the trust, as designated by the grantor. To note, the life insurance death benefit is generally tax-free.
• The ILIT cash can be used to potentially pay any estate or inheritance taxes due.

Looked at this way, the ILIT can be a useful estate planning tool that provides flexibility for the heirs in settling an estate. In many cases, the heirs do not have the cash readily available to pay a large tax bill—the ILIT helps the heirs avoid having to sell-off assets in the estate to raise it.

Seeking Guidance Before Creating an Irrevocable Life Insurance Trust

If you think this estate planning solution may make sense for your financial situation, the very first step is to ask for help. You can use one of our Wealth Managers as a sounding board to discuss your situation, and we can help you evaluate your options.

A key aspect of the ILIT to keep in mind is that the trust is irrevocable once it is set up. This mean you cannot terminate it, make changes to it, or withdraw the assets once you decide to move forward. So it’s important to be sure. Give us a call at 1-800-541-7774 today to start the conversation.

Source:

1. IRS: What's New - Estate and Gift Tax

2. Fidelity