2024 Wealth Transfer: 9 Tips for Tax-Efficient Success with Irrevocable Life Insurance Trusts (ILITs)

Debunking the misconception of life insurance as entirely ‘tax-free,’ it’s essential to acknowledge that while proceeds are generally income tax-free for beneficiaries, ownership at the time of death may subject them to estate taxes. Safeguarding against this, an Irrevocable Life Insurance Trust (ILIT) proves invaluable. Here are nine indispensable tips for ILITs, each playing a pivotal role in ensuring a seamless estate plan and preventing potential death taxes on life insurance proceeds within the trust:

Avoid making the insured the trustee or beneficiary of the ILIT.Ensure the ILIT is both the owner and beneficiary of the life insurance policy.Grant beneficiaries Crummey powers, enabling them to withdraw ILIT contributions to avoid adverse gift tax consequences.Minimize the insured’s direct contact with the insurance company.Provide the trustee the right to loan, sell to, borrow from, or purchase from the insured’s estate or other trusts.Ensure the ILIT allows contributions from individuals other than the creator.Avoid having the insured pay insurance premiums, delegate this responsibility to the trustee.Secure a federal taxpayer identification number for the ILIT.Consult with your advisor to allocate a portion of your generation-skipping tax (GST) exemption to the ILIT, mitigating GST for the trust and beneficiaries in the future.

Establishing an ILIT involves legal steps such as drafting a trust agreement, transferring assets, and ensuring the trustee, not the insured, owns the policy.

Leverage this potent estate planning tool to generate instant wealth for your family’s financial needs while shielding proceeds from estate and income taxes.