Tax Saving Techniques - Irrevocable Life Insurance Trust

This technique is a way to provide for the payment of taxes incurred. The ILIT is designed to own life insurance and involves various provisions including the withdrawal powers that are given to each of your descendants to ensure that the payments that are made into the trust are in the nature of gifts that qualify for the annual exclusion treatment. As a consequence, your exemption ($1,500,000) will not be reduced by the premium payments (since they can withdraw all the payments made into the trust, the transfers will meet the “present interest rule” for the annual exclusion).

Respecting the distribution of the trust after your death, we usually parallel that to the distribution that is set out in revocable living trusts. There are several possibilities here. In the ILIT trust you can set it out in a trust for your children with distributions in 20%, five-year increments through the ages of 25-45. Any variation on these ages and percentages is possible, dependent, of course, on how you want it.

A properly structured ILIT will cause the life insurance to be non-taxable in your estate. It also provides liquidity for the payment of debts and taxes. Since the ILIT is essentially a “bank” in your estate plans, it is usually a good idea to match the beneficiaries and manner of distributions coming out of the trust after your death with the provisions in your Revocable Living Trust. This way, the loans from the Irrevocable Life Insurance Trust to your estate (a mechanism that will be described in the ILIT) can eventually be distributed to the same people as are receiving the estate itself. The loan receivable (owned by the ILIT) and the loan payable (owed by the estate) cancel one another out once distributed to the beneficiaries. It is, therefore, a good idea, if possible, to have the pattern of distribution in the ILIT match that in the general estate.