Requiem for ILITs (Irrevocable Life Insurance Trusts)

My study group of like-minded Trusts and estates attorneys recently got together to discuss the ins-and-outs of ILITs. After a somewhat half-hearted review of the features and benefits of these trusts, we slowly realized the sad truth: It was time to bury these time-honored tax-saving mechanisms.

An Irrevocable Life Insurance Trust (“ILIT”) is—surprise—an irrevocable trust that both owns and is the beneficiary of a life insurance policy. When estate tax exemptions were much lower several years ago, meaning that more people were paying a “death tax,” these trusts were ideal because, at death, the life insurance policy was paid to the trust and, when done correctly, transferred the proceeds free from estate taxes. This, coupled with the absence of income taxes on life insurance proceeds (in most instances) made ILITs great mechanisms for minimizing the government’s hands on your money.

The downside of these trusts was that the original owner of the policy could neither change the trust nor remove the policy without taking great effort to find a substitution for the policy. In effect, the government allowed a tax benefit since the owner of the policy was divesting himself of control over the policy, and the ability to change his mind as to his choice of beneficiaries.

By way of illustration, in 2004 both the Federal and New York estate tax exemptions were $1,000,000, meaning that estate taxes were assessed starting on dollar $1,000,001. It was not uncommon for young couples to have million dollar policies solely for taking care of their spouse and children if they were to pass away.

Of course, as of 2015 the Federal exemption is $5,430,000, and in April the New York exemption increases to $3,150,000 and thereafter slowly creeps up to the Federal exemption amount in 2019.

So in the near future, unless a person is worth over $5,5000,000 (or a couple is worth over $11,000,000), an ILIT adds no additional estate tax savings AND also deprives the original owner of the policy from transferring or selling the policy as well as denying him the ability to change beneficiaries.

In essence, the tool for avoiding the death tax had itself died an inglorious death except for the few people (a) whose wealth surpassed that of 99.9% of Americans, and (b) who are healthy enough to attain life insurance without paying ridiculous premiums.

Our requiem for ILITs was memorialized by talking about our most-lively current cases and folding origami.

Q FOR YOU: Do you have an ILIT? Do you know what options are available to you in order to reclaim your life insurance policy from the trust?

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