Recent changes to the tax laws that went into effect after the passage of the American Taxpayer Relief Act of 2013 have caused many taxpayers to review and modify their existing estate plans. One estate planning tool that many people are wondering what to do with in light of the new laws is the Irrevocable Life Insurance Trust, or ILIT.
All estate assets owned by you at the time of your death are potentially taxable. The lifetime exclusion limit allows each taxpayer to exclude assets up to a certain amount from estate taxes. For many years, the lifetime exclusion amount was low enough that even taxpayer’s with a moderate estate were concerned about estate taxes. The limit was significantly raised in recent years but only on a temporary basis. The Act passed earlier this year made that permanent the temporary limit. With the lifetime exclusion limit now set at $5 million (adjusted yearly for inflation), many taxpayers who employed tax avoidance tactics in their estate plan are now re-evaluating those aspects of their estate plan.
ILITs have always been a popular estate tax avoidance tool. An ILIT allows you to purchase a life insurance policy and then transfer the policy into an irrevocable trust created by you. Since the trust is irrevocable, the assets you transfer into it are no longer considered to be owned by you and, therefore, are not subject to estate taxes when you die. When you die, the policy then pays out the proceeds into the trust and they are distributed to your trust beneficiaries. Now that you can exclude up to $ 5 million from estate taxes though, do you still need your ILIT?
Remember that you cannot modify and ILIT because it is an irrevocable trust. Although canceling the life insurance policy may effectively render the trust terminated, you should speak to your estate planning attorney before considering this tactic. Aside from the legalities involved, there are other benefits to an ILIT that may cause you to decide to leave yours as is despite the new tax laws.
Stephen A. Mendel, Estate Planning Attorney
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