For taxpayers who created an Irrevocable Life Insurance Trust, or ILIT, as a way to avoid estate taxes, questions about what to do with the trust are surfacing in light of the passage of the American Taxpayer Relief Act of 2013. The bottom line is that only a thorough consultation with your estate planning attorney can help you decide how to proceed with your ILIT; however, understanding the issues and the options may help.
Prior to the recent changes in the lifetime exclusion limit for the gift and estate tax, even taxpayers with moderate sized estates had to plan ahead to avoid owing a considerable amount in gift and estate taxes. One estate planning tool that was often employed to minimize exposure to estate taxes was the creation of an ILIT. The concept is simple. Create an irrevocable trust. Purchase a sizable life insurance policy. Transfer the policy to the trust. Because the trust is irrevocable, the assets held by the trust are no longer owned by you. Therefore, when you die, the policy pays out to the trust and the trust beneficiaries benefit from the proceeds without your estate incurring estate taxes on the proceeds. Now that the lifetime exclusion limit has permanently been increased to over $5 million, some taxpayers are wondering if they still need an ILIT.
First, remember that an ILIT cannot be modified absent court intervention because it is irrevocable. Although you may be able to cancel the life insurance policy and effectively terminate the trust, be sure to consult with your estate planning attorney first as there are other benefits to an ILIT that may make doing that the wrong choice.
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