Updated: Nov 2
For estate liquidity, where clients are heavily invested in:
- Closely held businesses
- Venture capital
- Private equity
- Hedge funds
- Real estate
- Other non-liquid assets
An ILIT can provide cash to fix or replace:
- Lost income (salary, bonuses, etc.)
- An asset that generated income and will be left to a charity or a non-family member
- Income from a business that will be inherited by heirs working in that business (estate equalization)
- Fixes the issues arising from divorce and multiple families
To create a continuing trust for beneficiaries if:
- They are less than competent to manage their own money
- They are disabled in some way or has special needs
This is a situation where the trust can also provide professional management for trust assets if the beneficiaries are less than prepared to manage significant wealth. If the grantor wants the heirs to receive principle, they can choose to have it paid out on staggered dates to the beneficiaries.
When it comes to creditor protection, this helps in:
- States where life insurance death benefit and cash value are not creditor protected
- When the trust holds other assets in addition to the life insurance
This can also provide spendthrift provisions where beneficiaries need creditor protection and/or they are with people who try to access their funds or assets.
Now, to save estate taxes:
- The money will be out of the estate when the grantor dies - hence will not be subject to the estate taxes that will be due nine months after date of death
- Premiums paid for the insurance in the trust can often be limited to the annual exclusion gift amount and, those premiums paid into the trust, will also reduce the size of the estate. Consider this as a forced gifting program.
The devil is in the details:
- Annual gifts
- From an account in the name of the trust
- Via a check payable to the trust and endorsed over to the life insurance company
- Are they still necessary?
- What when and how?
- Follow the advice of an estate planning attorney!
Considerations in regard to putting old insurance in a new ILIT
- Three year reversion
- Gifting an old policy to a trust
- Prefunding the ILIT to buy an old policy
- Selling an old policy to a trust
- Policy valuation
ILIT review and analysis
- Are any of the reasons the ILIT was created still valid?
- What assets are currently held in the ILIT?
- What are the current liquidity needs of the grantor/s and their family?
- How have the assets inside the ILIT performed? (life insurance, other assets)
- What can be done to change an IRREVOCABLE trust?
Using trust assets to buy other assets from the grantor
Taking care when changing the composition and/or all allocation of trust assets to not change the total value to the beneficiaries
For more information, refer to the attachments below:
Leigh joined NFP Insurance Solutions as Managing Director in 2014. She has over 20 years experience and a distinctive track record of wealth transfer and insurance expertise that includes all aspects of high-net-worth life insurance ranging from advanced underwriting and life settlement negotiation to portfolio analysis and case design.