Q: What is an Irrevocable Life Insurance Trust and do I need one if I own a life insurance policy?
A: An Irrevocable Life Insurance Trust, most often referred to as an ILIT, is an estate planning tool that can help reduce, if not eliminate, an estate tax due at your death.
It is a common misconception that life insurance is not part of one’s taxable estate. This is not the case. So long as you remain the owner of the policy, the death benefit value will be included in your estate at death. By moving the policy to an ILIT, the trust takes ownership of the policy and the policy’s value is out of your taxable estate.
The current federal estate and gift tax exemption is $12.98 million, and the New York State estate tax exemption is $6.58 million. Federally, an individual can gift up to $12.98 million during their lifetime or after death without incurring a federal estate tax. However, the IRS provides for an annual exclusion amount every year, which allows one to gift a maximum amount to any individual or entity without the gift being subject to the federal estate and gift tax. For 2023, this amount is $17,000. It is important to note that the federal gift and estate tax exemption is expected to sunset on or before January 1, 2026, reducing the exemption amount to somewhere between $5 million and $6 million, subject to inflation.
Although transferring the policy to the trust will remove its value from your estate, there are important tax implications to consider. Because the transfer of your policy to an ILIT would be deemed a gift under the IRS rules, a federal gift tax return must be filed for the transfer. Additionally, when the ILIT owns the policy, the trust will pay the premiums associated with the policy. You will first pay the money to the trust, and the trust will use the funds to pay the premiums. A properly drafted ILIT should provide that annual premium payments made to the trust qualify under the annual exclusion amount and do not require the filing of a gift tax return for the payment to the trust. On the chance the premium amount is more than the annual exclusion amount, you will need to file a federal gift tax return for the payment.
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While an ILIT is a great estate tax planning tool and may be the right vehicle for you, it is very important to consult with an experienced Estate Planning and Elder Law Attorney who can review your estate as a whole and design a plan that works best for you in accomplishing your estate planning needs.
Michal Lipshitz, Esq. is an attorney at Burner Law Group, P.C. focusing her practice areas on Estate Planning and Elder Law. Burner Law Group P.C. serves clients from Manhattan to the east end of Long Island with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.