Irrevocable Life Insurance Trusts

Irrevocable Life Insurance Trusts

Irrevocable Life Insurance Trusts are frequently used to create liquidity and create a tax-free legacy for the next generation.

Irrevocable Life Insurance Trusts (ILITs) are one of many tools used in estate planning. They are a valuable way to provide for cash liquidity at death in a tax-advantaged manner and to create a legacy for the next generation which is not subject to federal estate tax. The primary asset of the trust is typically a life insurance policy owned by the trustee (not the insured) insuring the life of the creator of the trust. Funding a trust with a second-to-die policy insuring the joint lives of a husband and wife may also be beneficial.

Federal estate taxes are due within nine months of death, and the IRS has a “cash only” policy. As you and your financial advisors consider the appropriate structure of your estate plan, an ILIT should be seriously considered, especially when liquidity is an issue.

Typically, this type of trust is created so that cash contributions made to the trust each year fully pay the life insurance premium due. If the trust is properly structured and administered, contributions may qualify for the donor’s annual gift tax exclusion so that the contribution is not subject to gift tax. The trust is further designed to be excluded from the taxable estate of the insured, allowing a significant legacy for children or grandchildren, free of wealth transfer taxes.

The mechanics of setting up an Irrevocable Life Insurance Trust usually include the following:

  • Establish your estate plan which may include an ILIT as an integral component
  • Your estate planning attorney drafts your ILIT document
  • Trust document names a Trustee and Successor Trustee
  • Trust document may name an advisory committee to directtheTrusteeregarding all matters related to life insurance policies held in the trust
  • Donor signs the trust document and contributes an existing life insurance policy or funds sufficient for the Trustee to purchase a new insurance policy
  • If directed, the Trustee purchases a new policy and pays the premium
  • If an existing policy is contributed to the trust, there is a three-year waiting period before the life insurance policy is not subject to estate tax in the donor’s estate; if a new policy is purchased by the Trustee, there is no three-year waiting period and the new policy is not included in the donor’s taxable estate
  • Trustee may be required to notify beneficiaries of withdrawal rights and to observe a holding period to assure that the contribution is not deemed to be a taxable gift
  • Annually, the donor contributes funds to pay the premium on the life insurance policy
  • Typically, due to the beneficiaries’ withdrawal rights, contributions to ILITs are considered immediate gifts to the beneficiaries of the trust, allowing the contributions to qualify for the annual gift exclusion limit per beneficiary

Upon the death of the insured, the life insurance proceeds are collected. These funds are added to the principal of the trust and the net income and/or principal is distributed by the Trustee to the beneficiaries or held in continued trust according to the terms of the trust document.

Fiduciary Duties and Responsibilities for Irrevocable Life Insurance Trust

Hilliard Lyons Trust Company, LLC when named as Trustee provides the following services:

  • We will pay the life insurance premiums for policies owned by the trust with trust resources.
  • Hilliard LyonsTrust Company will send a letter to the trust creator to remind him/her of a premium payment.
  • If the contribution of funds to pay the premium is a gift,we will send the necessary letters to the beneficiaries notifying them of the gift to the trust, according to the terms of the trust.
  • We will mail statements at least annually to appropriate individual(s).
  • We periodically review the soundness of the insurance policy(ies)and underwriting company(s).
  • When required,we file necessary tax return(s) with the Internal Revenue Service and state taxing authorities.

If you are interested in learning more about how Hilliard Lyons Trust Company, LLC can help with your estate planning goals and objectives and how an Irrevocable Life Insurance Trust might be a part of that plan, please contact your Hilliard Lyons Wealth Advisor.

Fees for Irrevocable Life Insurance Trusts with Hilliard Lyons Trust Company, LLC, Trustee

Annual Minimum Fee $2,500

Each Life Insurance policy (in excess of one) annually $500

Each set of Beneficiary Notice Letters (in excess of one) annually $150

Tax Reporting if required, approx. $250

If you have a substantial relationship generating more than $10,000 in revenue to Hilliard Lyons, the annual minimum fee is reduced to $1,500; all other fees apply as stated above.

Hilliard Lyons Trust Company, LLC

500 W. Jefferson St. | Suite 700

Louisville, KY 40202

502.588.8400 | 888.878.7845

312 Walnut St. | Suite 3120

Cincinnati, OH 45202

513.345.5251 | 800.884.1750

110 Main St.

Evansville, IN 47708 812.428.5147 | 888.426.1481

[email protected]

J.J.B. Hilliard, W.L. Lyons, LLC (Hilliard Lyons) and Hilliard Lyons Trust Company, LLC are affiliated companies. Neither Hilliard Lyons nor Hilliard Lyons Trust Company provide individualized tax, accounting or legal advice. This piece is intended for general educational purposes. Please consult your accountant or attorney for personal tax, accounting or legal advice.

© 2018 J.J.B. Hilliard, W.L. Lyons, LLC.

trust.hilliard.com

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