Over the next few weeks, I will provide an overview of Irrevocable Life Insurance Trusts (ILIT's) and how they are utilized to maximize "free money" to the next generation while also providing a pool of funds from which to pay any estate tax liability (trust me, it will be back).
An ILIT is generally an Intentionally Defective Grantor Trust (IDGT) that owns life insurance on the lives of the grantors. An IDGT, for our purposes, is simply a trust that is considered irrevocable for all purposes except income tax. Once a life insurance policy is transferred to an ILIT (please note, an ILIT can purchase new life insurance, but the cost tends to negate this option), and the grantors have survived for three years subsequent to such transfer, the policy's death benefit has been successfully removed from the grantors' estate. Moreover, a pool of money has been created from which all estate liabilities, including estate taxes (trust me, they are coming back) can be satisfied.
This seems like a relatively simple estate planning technique that can be utilized by everyone. Obviously, however, complications do arise, especially when the grantors own single life policies. Estate tax inclusion issues, income that is taxed that can never be received. All this scary stuff and more will be addressed in the next blog. In the meantime, should you have any quesitons regarding ILIT's, please feel free to contact our office.