Client Ready Guide: Direct Gifts, Life Insurance, and ILITs
Life Insurance:Your Blueprint for Wealth Transfer Planning
Direct Gifts to an ILIT
Life insurance has been a valuable estate planning tool for many years. It’s comforting to know that life insurance provides cash death benefits to your beneficiaries at your death — a time when cash may not be available but may be needed.
Life insurance usually has three unique advantages that are hard to duplicate because policy death benefits:
■ Are usually larger than the total premiums paid into the policy.
■ Are usually paid to the beneficiary free of federal and state income taxes.
■ May be exempt from claims of the insured’s and the beneficiaries’ creditors (consult with your attorney to determine the extent of the exemption in your state).
That’s why death benefits are regularly used to retire a decedent’s debts, satisfy bequests, pay state and federal estate tax obligations and provide funds for survivors’ living expenses.
Direct Gifts to an ILIT
One of the simplest ways to transfer family wealth is through lifetime gifts to an Irrevocable Life Insurance Trust (ILIT). Parents who create ILITs often take advantage of either of two gift tax breaks to fund the trust with cash to pay policy premiums:
■ Allows up to $13,000 (in 2010) per trust beneficiary.
■ Allows non-present interest gifts of up to a total of $1,000,000 (in 2010) in the grantor’s lifetime.
Gifts to an ILIT using either of these methods have a number of potential advantages including:
■ Gifts used to pay life insurance policy premiums may potentially be leveraged into larger death benefits.
■ Transfers to the trust should be gift tax free.
■ Death benefits are generally federal income tax free under IRC Section 101.
■ When the ILIT is properly drafted, the policy death benefits should be estate tax free.
■ While in the trust, assets (including the policy) may be protected from claims from the beneficiaries’ creditors and former spouses.
■ The grantor may retain an element of control by drafting the terms of the trust and selecting the trustee.
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