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The Importance of Irrevocable Life Insurance Trusts in Estate Planning


Life insurance is an asset we all need to help protect our families, businesses and provide financial security in the future.  In addition to the traditional view of life insurance as a source of replacement income for our families in case of death, life insurance can also be used as a resource to help pay estate taxes and protect wealth in an individual’s estate plan.  Funding an irrevocable life insurance trust (ILIT) can be used as an advanced estate planning technique to provide liquidity to pay estate taxes and allow wealth to pass to future generations outside of the individual’s estate.

One of the main advantages to setting up an ILIT is to provide liquidity to an individual's estate.  The top estate tax rate for 2017 is 40%.  As a result of this estate tax burden, many times heirs are forced to sell real estate, stocks or closely held family businesses in order to raise the monies to pay the estate taxes due.  This presents many problems including the fact that real estate values may be depressed, the stock market could be suffering from a slow economy, and the heirs may want to keep the assets in the family.  Life insurance can provide proceeds that can help alleviate this tax burden. 

Life insurance is a significantly large asset in most estates and an asset that most people agree they need to have.  Federal estate taxes must be paid within nine months from death on estates that have a net value of more than $5,490,000, which is the current exemption amount for 2017.  This amount is indexed annually for inflation.  Taxes are paid on the excess over the current exemption amount at the current estate tax rate of 40%.  Insurance policies in which an individual possesses “incidents of ownership” in the policy are included as a part of the total estate.  “Incidents of ownership” is a broad term that includes outright ownership of the policy, as well as the right to change a beneficiary, borrow against the policy, or use the policy as collateral for a loan.  Since life insurance can be a significant asset, this can greatly increase the amount of an estate and subsequently the estate tax due.  One way to work around this is to put life insurance policies inside of an ILIT.  The policy is then technically owned by the trust and no longer considered a part of the individual’s taxable estate.  The proceeds are then free of any estate tax and do not increase the total estate.  This can be a very inexpensive way to provide immediate funds to pay estate taxes.

Setting up an ILIT can provide many potential tax advantages, but it is not a decision to be entered into without weighing the particular facts and circumstances of each situation.  An ILIT is an irrevocable trust, meaning that once it is set up, the grantor (the person who sets the trust up) cannot make changes to it, withdraw assets or terminate it.  It is a sophisticated technique that is not suitable for all cases.  Therefore, it is prudent to seek advice from a CPA or estate planning attorney who has experience with these types of trusts.

If you have questions about setting up an ILIT or any other tax-related questions, please contact Kirby L. Coker, CPA at (843) 237-9004 or

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Nelda Fields | Debra Turner
Nelda Fields | Debra Turner
Healthcare Services Group | Partners
(843) 577-5843
40 Calhoun Street, Suite 320
Charleston, SC 29401
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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