Irrevocable Life Insurance Trusts (ILITs) stand as a strategic tax planning tool, designed to help individuals and families reduce their taxable estate by holding one or more life insurance policies owned by an irrevocable trust.
ILITs are trust structures established to purchase and own a life insurance policy on the grantor’s life. There are three legal parties to the trust:
· The Grantor –You or the person that creates and finances the trust and chooses a trustee to manage it.
· The Trustee – The individual or organization that manages the trust and assumes responsibility for paying annual insurance premiums and overseeing trust administration.
· The Beneficiaries – The individuals who will receive the trust assets upon the grantor’s death.
Effectively, by creating an ILIT you’re separating the value of the assets your trust owns from the value of your taxable estate. The trustee coordinates the payment of premiums with the insurance provider to ensure the policy remains in force. When you die, the policy’s death benefit is then paid directly to your irrevocable trust, which in turn distributes the proceeds to the trust’s beneficiaries. One major downside is that ILITs are irrevocable. Whereas a revocable trust can be easily modified or terminated because the assets are still considered a personal asset, you relinquish control over assets when you gift them to an irrevocable trust. Therefore, the trust cannot be modified without the consent of the beneficiaries.
One of the most tax-efficient ways to pay the annual insurance policy premiums is to use your annual gift tax exclusion (currently $18,000 per year for each trust beneficiary in 2024) to fund the trust each year. Once the funds are received by the trust each year, your beneficiaries would receive a written notification (these are called “Crummey Notices”) allowing them the option to take those funds as a distribution. Understanding the purpose of the trust, they would then decline the withdrawal—making the funds available for the trustee to pay the required insurance premiums.
If you live in Minnesota and your estate is valued at more than $3 million (or $6 million if married) dollars when you pass away, you may be subject to estate taxes. MN estate taxes range from 13% – 16% over the MN exemption.
Starting on January 1st, 2024 the federal lifetime gift and estate tax exemption amount will increase to $13.61 million per individual ($27.22 million if married). It is important to note that the increased federal gift and estate tax exemption amounts are set to expire on December 31, 2025, under the 2017 Tax Cuts and Jobs Act. Unless there are legislative changes, the exemptions will revert to $5 million per person, adjusted for inflation, starting January 1, 2026. Federal estate taxes range from 18% – 40% over your lifetime federal exemption.
In summary, Irrevocable Life Insurance Trusts serve as a powerful financial planning tool, offering enhanced control, tax efficiency, and strategic wealth preservation for individuals and families navigating the complexities of estate planning. If you would like to learn more about irrevocable life insurance trusts and other estate planning strategies, please contact one of our Nepsis, Inc.® professionals.
Advisory Services offered through Nepsis, Inc., An SEC Registered Investment Advisor.