ILIT

The ILIT will be funded either from the clients’ existing life insurance policies or with a new policy.* A second-to-die policy insures the lives of both spouses, and distributes proceeds upon the death of the surviving spouse. The ILIT will be established by the clients and the clients will name a trustee to administer the ILIT. The trustee will pay the premiums using amounts the clients contribute to the ILIT’s checking account. However, if properly structured, the clients’ contributions will not constitute taxable gifts. By implementing an ILIT, the clients are creating a source of income and estate tax free cash which may be used by the clients’ family to pay any estate tax liability due on other assets upon the death of the surviving spouse.

* If the clients use an existing policy and do not survive for more than three years after the funding date, the proceeds will be part of clients’ estate. Therefore, it is preferable to fund the ILIT with a new policy.

At Surviving Spouse’s Death

The insurance proceeds will pass to the ILIT free of federal income and estate tax. These tax-free proceeds may be used to help pay the estate tax due at the death of the surviving spouse. For example, if the estate consists primarily of real estate, the estate would need to sell the real estate quickly to cover its estate tax liability (which is due 9 months after death). However, if an ILIT was established, the insurance proceeds may be used to purchase the real estate from the estate, and the estate may use the proceeds to satisfy the estate tax liability. The real estate may then be sold at a later date for a higher price. Additionally, the insurance proceeds may be used to help pay any administrative costs of the estate. Thus, using an ILIT can help preserve the full value of the estate for the clients’ family.