Life insurance has been commonly recommended to individuals who may have an estate tax obligation. Depending upon the liquidity of your assets, you may want to purchase life insurance to provide liquidity or to replace estate tax. However, according to Thomas B. Strauchon in Life Insurance and the Highly Liquid Ultra-High Net Worth Client, Why and Where It Fits, there are a number of reasons why the Ultra-High Net Worth (UHNW) client may choose to use life insurance regardless of the size of the taxable estate or the corresponding amount of the estate tax liability. Prior to identifying several of the reasons to “hedge,” Strauchon stresses that “state-of-the-art life insurance delivers investment-grade returns of the death benefit on invested premiums at life expectancy.”
Hedging Your Bets
Strauchon suggests UHNW individuals should obtain life insurance as a “hedging strategy” against:
- Incomplete wealth transfer strategies that require time and favorable market outcomes;
- The changing income, capital gains and estate tax environment;
- The changing liquidity profile of the estate that reduces the amount of liquidity;
- Generational dilution of wealth; and
- Unforeseen disallowed entity or asset discounts by the IRS.
An ILIT Benefits Your Beneficiary’s Heirs
One planning technique you may want to consider in conjunction with life insurance is an Irrevocable Life Insurance Trust (“ILIT”). The ILIT is a type of trust that is designed to own a life insurance policy. It is best when the trust purchases the policy at inception, however, you can also transfer the ownership of an existing life insurance policy after formation of the trust, but need to be careful to avoid the three year rule that would keep the proceeds in the estate of the insured.
The ILIT would contain generational-spanning trusts that would last up to the applicable rule against perpetuities (in Florida, 360 years). In other words, the trust would provide for each beneficiary's interest in the trust to benefit the beneficiary's heirs or nominees following the death of the beneficiary, rather than to creditors of the beneficiary's estate. Additionally, by establishing a new ILIT, the income and principal going to your beneficiaries can be protected within the trust for their lives from creditors and divorcing spouses (i.e., a "spendthrift clause").
Protecting the Future of Your Family
Morris Law Group can custom-design an ILIT for you that includes generational spanning trusts to benefit your heirs. A generational spanning trust can be contained in a revocable or irrevocable trust. The Morris Law Group Generation Spanning Trust is intricately designed and highly detailed, allowing you to set aside the maximum estate tax and generation-skipping tax exemption amount in a trust for the benefit of your descendants.
For more information about ILITs and Generation Spanning Trusts, please contact us or request a consultation with one of our knowledgeable attorneys today.