Introduction to Irrevocable Life Insurance Trusts (ILITs) - Part 4
Just a few quick follow-up notes on things I've already discussed in this series:
1. As I said in Part 1, the main reason people create ILITs is to pass more of their assets on to their beneficiaries free of estate tax. But that's not the only reason -- another reason is liquidity. Let's say that you die with a taxable estate and a family business that can't be liquidated easily to pay your estate tax bill. What to do? If you set up an ILIT correctly during your lifetime, the trustee of the ILIT can purchase assets from your estate or from the trustee of your living trust, and can pay cold, hard cash for these assets (which the ILIT trustee received when he or she collected the insurance proceeds on your life). Your executor or the trustee of your living trust can then use this cold, hard cash to pay your estate tax bill.
2. In Part 3, I talked about one of the "dangers" in transferring existing whole life policies to an ILIT. Another problem -- more of an inconvenience, really -- is that those policies have a value for gift tax purposes. You can find out this value by requesting a Form 712 from your insurance company. This value will need to be included on your gift tax return, and is equal to (wait for it) the policy's "interpolated terminal reserve value" plus any premiums you've paid for a time period after the date of the gift. Fun!
3. The biggest mistakes I see with ILITs are:
(a) the failure of the grantor to understand that he or she no longer owns or has any interest in the property;(b) the failure of the grantor to understand that "irrevocable" means "can't amend or revoke"; and
(c) the failure of the trustee to continue to administer the trust correctly, by preparing income tax returns, by sending notice of each contribution to beneficiaries, and by keeping good, clear records of what has been done.
