Pinnacle Estate Planning

By JASON GRAY

Pinnacle Law PLLC

    As estate taxes and planning complexities increase, many individuals seek strategies to protect their assets for future generations. One popular tool is the Irrevocable Life Insurance Trust (ILIT), which can be used to remove life insurance proceeds from the taxable estate while providing liquidity to pay estate taxes or other expenses. Here’s a closer look at how ILITs work, their benefits, and considerations for those interested in using them as part of their estate planning.

   An ILIT is a type of trust that holds a life insurance policy on the grantor’s life, allowing the policy’s death benefit to be excluded from the grantor’s taxable estate. Once the ILIT is created, the grantor, or person creating the trust, cannot make changes to it, hence its designation as “irrevocable.” This lack of control is precisely what allows the death benefit to remain outside of the estate, providing significant tax savings.

    The creation of an ILIT typically involves several steps. First, the grantor establishes the trust and funds it either by purchasing a new life insurance policy or transferring an existing policy into the trust. If a policy is transferred into the trust, the IRS imposes a “three-year rule,” meaning the death benefit will only be excluded from the taxable estate if the grantor survives for three years after the transfer. New policies placed directly into the ILIT avoid this rule, allowing immediate estate tax benefits.

    One of the primary advantages of an ILIT is that it creates liquidity upon the grantor’s death. Estate taxes are typically due within nine months of death, but large estates often consist of illiquid assets, such as real estate or family-owned businesses. The death benefit from an ILIT can provide the necessary cash to pay estate taxes or other expenses, avoiding the need to sell assets. Additionally, the trust can specify beneficiaries and terms for distributions, ensuring that heirs receive funds in a controlled manner.

    ILITs also offer protection from creditors. Since the trust, not the individual, owns the policy, the death benefit is shielded from creditors in most cases, offering peace of mind that the funds will go to the intended beneficiaries.

    There are, however, some other considerations. Contributions to fund the policy premiums may be subject to gift tax rules, though annual exclusion gifts can often be used to minimize or eliminate this tax. Properly structuring premium payments and understanding the gift tax implications is essential.    Consulting an estate planning attorney and financial advisor is highly recommended to ensure compliance and alignment with the grantor’s broader estate plan.

    ILITs can be a powerful tool for families with significant life insurance policies who want to maximize what they pass on to beneficiaries while minimizing estate taxes. While setting up an ILIT requires careful planning, the potential tax savings and asset protection benefits make it a valuable option for those looking to secure their legacy.   

Jason Gray is the owner of Pinnacle Estate Planning. To schedule a free consultation in Spokane, Coeur d’Alene, or Sandpoint please call (208) 449-1213 or (509) 505-0665. www.LawPinnacle.com

*This article is for informational purposes only and should not be construed as legal or financial advice.