Building Wealth Outside of the Estate
Previously, we briefly outlined the three basic types of life insurance, tax treatment and uses of cash value. Today we will look at one of the most important and powerful estate planning strategies one can use – The Irrevocable Life Insurance Trust (ILIT).
The ILIT is one of the most commonly used tools in estate planning. ILITs are designed to take ownership of the life policy outside of a person’s gross estate. By removing policy ownership from the insured’s gross estate, policy proceeds avoid estate taxation. This means that for every dollar of insurance proceeds received, a dollar will be available to meet post death financial needs. By contrast, personally owned insurance is generally includible in the gross estate. A portion of every dollar may be consumed by estate taxation of the policy proceeds themselves. Only a portion will go towards the intended use of the policy proceeds. Owning life insurance in a properly drafted ILIT is one of the most powerful asset leveraging strategies available.
The strategy is not just for the very wealthy. It plays an important role in a variety of estate-planning objectives such as:
- Equalizing the estate for heirs
- Protecting assets from liens and creditors
- Providing for control of assets after the distribution of the estate
- Bequests to charities
- Business continuity and succession plans, and
- Providing cash for the settlement of estate transfer liabilities
How does an ILIT work?
An ILIT is created to take ownership of a life insurance policy. Trustees are established to oversee that it is administered properly. In order for the life insurance death benefit’s proceeds not to be included in the insured’s estate, the trust must be irrevocable. This means the terms of the trust generally cannot be altered, amended or revoked by the insured. The beneficiaries and their shares must be set at the time the trust is established. If there is uncertainty as to who the beneficiaries should be, or what their shares should be, then an irrevocable trust may not be appropriate.
If the grantor wishes to exert control over the trust assets after his or her death then it’s a good idea to make the trust itself the beneficiary of the policy. In this way the terms of the trust dictate the distribution of assets as per the grantor’s wishes. The ILIT also provides asset protection for beneficiaries if they are ever confronted with litigation, creditors or lien holders because the property held in ILITs is not considered to be the property of the beneficiaries.
The ILIT strategy is a worthy consideration for families who want to build, distribute and control the distribution of wealth outside of their estate. It is imperative to work with an advisor who has experience with ILITs to make sure the strategy is set up accurately and administered properly. Please contact me if you want to learn more about the strategy.
Dwight Davenport
Principal, Vodia Capital, LLC
