Proposal May End the Use of ILITs

Legal lingo is full of acronyms, including ILIT which stands for irrevocable life insurance trust. It is a fairly advanced estate planning tool used by higher net worth families to minimize the possible impact of federal estate taxes upon death; especially attractive to business owners who have a lot of wealth on paper, but not so much in the liquid sense.  ILITs allow someone to set up a trust, and gift money to that trust.  The trust purchases a life insurance policy on the person.  Upon his or her death, the insurance pays into the trust and now there is liquid cash available to pay an estate tax, but it is outside of his or her estate.  It is a way to prevent dipping into a business or farm's equity.  And it may become a thing of the past.

The President's FY2013 Green Book, or fiscal proposals, calls for ending ILITs.  No longer would the assets be excluded from the decedent's estate nor would distributions during the grantor's life not be subject to the gift tax.  The proposal does not makes this change retroactive, but rather applies to trusts created on or after the date of enactment.

My legal practice focuses on issues of illness, death and taxes for the middle class.  With a federal tax exemption level of $5 million (currently), nearly none of my clients are concerned with the tax of ILITs.  However, some touch on the fringes of this number, especially those building businesses.  As changes to the federal exemption level develop, and a possible extinction of the ILIT, it is an issue I will monitor and post as needed.

Thanks for reading, and remember a blog post is not your lawyer.  Please consult with an attorney for advice on the specifics of your situation.  And a special thanks to my law clerk, Sarah Wood, for her research on this topic.