Friday, October 12, 2018

Irrevocable Life Insurance Trusts (ILITs) in the Current Environment

Irrevocable Life Insurance Trusts (ILITs) have always been a strong planning technique for the inevitable estate tax. However, due to periodic increases in the federal estate tax exemption over the last two decades, the estate tax is no longer a concern for most United States residents.

The current federal exemption is $11.18 Million per person ($22.36 Million for a married couple) leaving almost 99.9% of US individuals without the worry of a federal estate tax upon death. Thus, very few individuals feel the need to form an ILIT to own their life insurance for estate tax purposes.

Although ILITs may no longer be deemed necessary by many individuals for estate tax purposes, we still strongly believe that ILITs be utilized for asset protection purposes, as life insurance policies are not always protected from creditors. Rather, the creditor protection of a life insurance policy is state specific and determined by the state statute in which the insured resides. Life insurance policies are protected from creditors in Florida, however, there are many states in which they are not. Thus, if you reside in a state where life insurance policies are not statutorily protected, an ILIT may be essential in order to protect the policy from creditors.      

Additionally, an ILIT provides  enhanced asset protection to the beneficiary of a life insurance policy, as the death benefit will pass to the beneficiary in a trust rather than outright. While the assets remain in the irrevocable trust (assuming the terms are sufficient), they will be protected from creditors. Alternatively, if the death benefit is distributed outright to a beneficiary, such amount may be obtainable by that beneficiary’s creditors.      

Please do not hesitate to contact Morris Law Group should you have any questions about establishing an ILIT.