ILITs—Minimizing Taxes


ILITs—Minimizing Taxes

Many estate planning practitioners view the irrevocable life insurance trust (ILIT) as one of the most flexible and useful tools they can put to work on behalf of their clients. While the issue of where the ILIT fits into the overall estate planning process can be somewhat confusing, a closer look reveals its potential advantages.

Inheritance Comes with a Price

Typically, the size of your assets dictates the amount of estate tax planning necessary in your personal situation. Under current law, the estate tax is repealed in 2010. However, this does not eliminate the need for planning because the repeal is in effect for one year only. According to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax will be reinstated in 2011, with an applicable exclusion amount of $1,000,000 per individual and a maximum tax rate of 55%.

If you are married, a properly drafted and executed will and inter vivos (living) trust for you and your spouse—coupled with proper asset ownership—could help you pass the first $2,000,000 (in 2011) of your estate to your heirs free of federal estate taxes. However, estates exceeding this amount (or $1,000,000 for single individuals) may incur federal estate taxes. For this reason, the ILIT has become a popular technique to help provide liquidity for estate taxes and to ensure the maximum amount of your assets are passed to your family in full.

Opportunity Knocks

When properly implemented, the proceeds of an ILIT will not be included in your estate. They will be payable to the ILIT’s beneficiaries (generally, children and gr andchildren) without being diminished by estate taxes.

An ILIT can purchase a life insurance policy on your (the donor’s) life, with the policy premiums funded by annual gifts you make to the ILIT. If properly structured and administered, your annual gift tax exclusion ($13,000 annually per donee and $26,000 for gifts made by husb and and wife) can be used to make gifts to the ILIT.

In more advanced uses, an ILIT can be a useful strategy to help ensure continuity in a closely held business. For instance, passing a family-owned business of substantial value to heirs may be hampered if the heirs are required to produce the funds (in cash) to pay the associated large estate taxes. These taxes, in some instances, may require a forced sale of the business in order to raise the necessary cash to pay them. However, an ILIT can purchase/own a life insurance policy on the owner, with the death benefit providing the cash needed to help meet estate tax obligations and keep the business in the family.

Securing Your Future

Estate planning is an ongoing process that requires a personal commitment and the assistance of an experienced estate planning attorney in order to help ensure your desired intentions are fulfilled. Although an ILIT can be an integral part of your overall plan, it is important to underst and that effective estate planning strategies are usually the result of the coordinated efforts of your insurance, legal, and tax professionals.

Pursuant to IRS Circular 230, MetLife is providing you with the following notification:

The information contained in this article is not intended to ( and cannot) be used by anyone to avoid IRS penalties. This article supports the promotion and marketing of life insurance. You should seek advice based on your particular circumstances from an independent tax advisor.

Neither MetLife nor any of its affiliates, employees or representatives provides tax or legal advice. Please consult with your tax advisor or attorney regarding your personal situation.

Copyright © 2010 Liberty Publishing, Inc. All Rights Reserved.

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This article appears courtesy of Karl Susman. Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast. You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116