Estate Taxes Avoidable?

#estatetaxes estatetaxexemption ilit irrevocable life insurance trusts Oct 30, 2023
Estate-taxes-possibly-avoidable-Attorney with questioning look in front of curious person doing research on their laptop

The Return of the Irrevocable Life Insurance Trust?

Irrevocable Life Insurance Trusts might be making a big comeback as a popular tool to help avoid estate taxes and to help pay those taxes and other expenses without having to liquidate assets. But how do these irrevocable trusts work? What needs to be done to set one up? How are premium payments for the insurance handled? In this installment, Jeff reviews the ins and outs of “ILITs.”

Currently, the federal estate tax exemptions are at about $13 million per person ($12.96 million to be exact), meaning that an estate with less than that amount is not subject to federal estate taxes, but every dollar above that is taxed at about 40%. No one wants to pay that, even if an estate only goes over by $100,000 and the tax bill on a $13.06M estate is $40,000. However, the estate tax exemption "doubling" sunsets at the end of 2025, and now suddenly asset growth can push more families into that tax bracket over the next 20 years.

One easy solution that has fallen off in the last decade plus is owning life insurance in an Irrevocable Life Insurance Trust, commonly called an "ILIT." By owning life insurance through an ILIT, the life insurance pays into the trust to provide liquidity to help pay taxes and other expenses, but at the same time the value of the life insurance payout is not part of your taxable estate which would only add to the tax problem.

However, there are some big drawbacks:

  • You cannot be the trustee or beneficiary of this trust
  • You should "gift" the premiums on an annual basis to the trust rather than monthly
  • The Trustee has to submit paperwork for signature to the beneficiaries of the trust each time the trust receives money, and the beneficiaries have to sign off that they don't want the money
  • The trust is irrevocable and cannot be changed once it is set up.

These sound like a lot of downsides and the paperwork formalities seem annoying (and they are), but in order to potential save hundreds of thousands or even millions of dollars in estate taxes it is worth it. For more on exactly how this trust works, subscribe to the YouTube channel here to see the full video on the ILIT process on Thursday, November 2.

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