"Ways To Revisit Irrevocable Life Insurance Trusts"

In the not too distant past, the Federal and Ohio estate tax rates were significantly higher and the exemptions were significantly lower. Twenty years ago, an individual’s estate was subject to federal estate tax at a rate of 55% on assets over $675,000 and to Ohio estate tax at a rate of 7% for assets over $200,000. Irrevocable life insurance trusts (ILITs) were an effective way to pay the Federal and Ohio estate tax with assets that were not subject to the estate tax.

An ILIT is a tool in which an individual creates a trust, then gifts money to the trust, usually annually. The annual gifts are typically subject to a demand right, which qualifies the gift for the annual gift tax exclusion, and thus not subject to the unified estate and gift tax exemption. The trustee of the ILIT purchases a life insurance policy on the individual’s life. When the individual dies, the individual does not own the policy, so it is not part of the individual’s estate. If there is an estate tax due, the trustee purchases assets from the estate or loans funds received from the life insurance policy to the estate. The estate then uses the liquid cash to pay the estate taxes. The ILIT retains other assets, such as the family business, and lower estate taxes are paid overall, because the life insurance proceeds aren’t included in the individual’s gross estate.

Today, the federal estate tax exemption is $11,400,000 and Ohio no longer has an estate tax. This means an individual can transfer $11,400,000 without incurring any estate tax. The ILIT is still a very effective tool in paying the federal estate tax, however fewer people need that tool. So the questions are whether the ILIT is still necessary and if not what does one do with it?

Is the ILIT still necessary?

A close review of the ILIT terms and the life insurance policy it holds will help determine whether the ILIT is still a useful tool and whether the life insurance policy is the right policy. Perhaps, without the estate tax burden, the individual would like to use the annual premium payments for other investments or simply doesn’t have the funds to continue the gifts. Perhaps the cash value could be used to fund children’s or grandchildren’s education. Perhaps the children, minors when the ILIT was created, are now capable to serve as trustees. Perhaps the individual still has the funds to continue payment and the ILIT still makes sense. If that is the case, things can remain status quo. Reduce the policy to paid up value For the individual that does not want to or does not have the ability to continue to make payments, this option allows the death benefit to be reduced based on the current cash value. This is the best option if the ILIT is still desirable, the current value of the life insurance policy is not needed, and the individual does not want to make further payments. Upon the individual’s death, there will still be a death benefit, but it will be less than if the premiums continued to be made.

Click here to read Kate's full article in the June 2019 Cleveland Metropolitan Bar Journal.

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