What is an ILIT?

ILIT- Irrevocable Life Insurance Trust

The estate planning process has a great deal of complexity and legal jargon. Likewise, there are many acronyms and abbreviations. One of the acronyms we would like to cover is the ILIT.  ILIT stands for “irrevocable life insurance trust” and it can be a very useful tool for dealing with estate taxes. Let’s suppose an individual has founded a successful business which he/she would like to pass on to the children. Like many entrepreneurs, the patriarch/matriarch of this family business has reinvested nearly all of their extra cash into the business and its value has grown to millions of dollars. Even with the currently high estate tax exemption amounts ($11.7 million per person, indexed for inflation), it is easy to see how a very successful family business or farm could easily reach a value exceeding these thresholds. If the founder/owner of this business suddenly passed away, transferring its value to the next generation could be problematic because estate taxes are typically due nine months after the date of death. Where would the next generation come up with the cash to pay the estate transfer taxes that would become due? Since most excess cash has been redeployed back into the business for years, how could they quickly extract the funds needed to satisfy the bill to the IRS? Will they be forced to sell a portion or all of the business at a “fire sale” price in order to come up with the cash needed?

Life insurance has traditionally been a useful product which can create such needed liquidity upon the death of the covered individual. However, keeping the death benefit from being included in the estate of the insured can be tricky. After all, if the company founder was the owner of the life insurance policy on their own life, and the estate was named as the beneficiary, the death benefit would be included along with the business in the value of the estate. Here is where the ILIT comes into play. A Trust is a legal entity that is distinct and different from an individual. If the business owner creates this trust and directs the Trustee to purchase a life insurance policy on the business owner’s life, the death benefit can be outside of the business founder’s estate. The trust must be irrevocable and the insured must not retain any incidents of ownership on the policy. Typically. the trust will be written to direct the Trustee to make the death benefit proceeds available to the founder’s heirs to be used to pay any estate taxes due. The family business won’t have to be sold, and sufficient cash can be available to pay the IRS.

If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.  You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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