Nitesh Patel

Irrevocable Life Insurance Trust may Provide Flexibility During Estate Tax Uncertainty
By Nitesh Patel

Recent changes to the estate tax law and the Senate�s rejection of a proposal to permanently repeal the federal estate tax leaves many wondering how important estate planning will be in the future. Will there be an estate tax? Trusts are frequently used to minimize estate tax liabilities, but in light of the estate tax uncertainty, is an irrevocable life insurance trust still a relevant tool and can it provide flexibility?

First, it is important to understand that there is an estate tax now, and there will probably continue to be an estate tax. The defeat of attempts to make the estate tax repeal permanent underscores this likelihood. Under the current law passed in 2001, the estate tax is phased down through 2009 and then goes away in 2010. However, the tax returns at a top rate of 55 percent for 2011 and thereafter. Additionally, many states are imposing state inheritance and estate taxes to restore revenue lost by the federal changes.

Life insurance can be a powerful estate-planning tool because it can replace income, provide liquidity at the insured�s death and serve as a vehicle for passing on assets to heirs. Choosing an appropriate ownership structure for a life insurance policy is important. In some situations, setting up a trust is the best solution to help remove assets from the taxable estate and minimize estate tax exposure.

An irrevocable life insurance trust (ILIT) often has a life insurance policy as its sole asset. A third party acts as the trustee and controls the property according to the trust terms - it cannot be revoked or modified by the insured. Life insurance proceeds are payable to the ILIT, which means they are not included in the grantor�s estate, and therefore the trust and beneficiaries will receive the full amount of the proceeds free of estate and income taxes. An ILIT might be used, for example, when naming a spouse as the owner would create a tax problem and the children are minors.

If an ILIT is included as part of an estate plan, here are just a few of the flexible provisions that should be considered to accommodate possible changes in the future:

Trustee provisions:
Authority to access policy values during the insured�s lifetime.