Irrevocable Life Insurance Trusts

At Lee Stoerzinger Wealth Management, we have developed a strong group of relationships regarding complementary resources within our business. The following article is from a good friend and colleague, Justin Bonestroo, whose firm offers comprehensive estate planning services. Please reach out to us if you have questions or if you would like to connect with Justin.

An Irrevocable Life Insurance Trust (ILIT) is an estate planning mechanism used to reduce the size of a decedent’s estate and thereby reducing the estate tax burden, and/or creating non-taxable liquidity for an estate or heirs.

Many families will transfer existing life insurance policies into an ILIT because such transfer moves the policy, which often has significant value in death benefit, out of an individual’s taxable estate upon death. As a result, there are less taxes to pay and more of your hard-earned money will go to your loved ones. The current estate tax exemption in Minnesota is $3,000,000.00 and federally is just over $13,000,000.00. Removing life insurance from an individual’s estate may be more important than ever come December 31, 2025, when the current federal estate tax exemption is set to sunset without bipartisan congressional action. Without further action by Congress, and a signature from the White House, the federal exemption will reduce to $5,000,000.00 per person (adjusted for inflation since 2017).

An ILIT is also helpful where an estate lacks liquidity for an inevitable estate tax bill or there is a preference not to sell a property(ies), a business(es), or farmland to pay the estate tax. With an ILIT, upon the decedent’s death, the policy’s death benefit is paid directly to the ILIT tax free, which in turn distributes the proceeds to the beneficiaries or gets used to pay estate taxes so that the remainder of the decedent’s estate can be paid to the beneficiaries without dismantling the assets, selling the property, business, or farmland upon a decedent’s death.

The downside to an ILIT is that it is irrevocable. A revocable trust can be amended or terminated because the grantor retains ownership over the assets and typically serves as the Trustee of their trust during lifetime. But the grantor relinquishes all control over assets transferred to an irrevocable trust and they cannot pull them back into their estate. An ILIT cannot be modified without legal action, or in some cases, the consent of all beneficiaries.

ILITs are amazingly effective vehicles for tax avoidance and/ or mitigation but are also complicated estate planning instruments with special rules that must be followed to make them valid and properly funded. It is important to consult an attorney or professional advisor to determine if an ILIT is appropriate for your situation.

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