Using An ILIT For Estate-Tax-Free Liquidity

No one likes paying the estate tax.  But the estate tax is especially problematic for individuals that own valuable but illiquid assets.  Common scenarios where this is an issue is a person who owns their own business, who owns stock in a family-owned or other closely-held business, or who has substantial real estate holdings.  These assets can trigger a large estate tax liability, but present heirs with no assets that can be easily sold to pay the tax—or at least no assets that they would want to sell to pay the tax.

So suppose you are such an individual.  What do you do?  Well, you could leave your heirs cash with which to pay the estate tax.  But that means having a lot of cash sitting around awaiting your death.  Also, to do that you would have to leave enough cash to pay the estate tax not only on the assets but on the cash as well.  You could purchase life insurance on your life—this would tie up far less cash now.  But life insurance benefits are subject to the estate tax, so you still have to purchase enough to provide the cash AND pay the estate tax on the life insurance.  You could buy a life insurance policy and give it to your heirs, but that creates gift tax problems now and potential creditor problems down the road.

Enter the ILIT.  An Irrevocable Life Insurance Trust (ILIT) can be established which would then purchase a life insurance policy on your life (or a second-to-die policy on you and your spouse).  Because the ILIT owns the policy, not you, the benefits paid are not subject to the estate tax.  Because the ILIT purchases the policy, there is no gift issue.  Because the ILIT owns the policy, it is exempt from creditor claims.  The ILIT can be a great tool to provide cash free of the estate tax.  But, like most estate planning techniques, it has drawbacks.  As we repeatedly say here, virtually all estate planning measures have pros and cons.  Probably the biggest con is the lack of ability to alter the ILIT once established, making it imperative to thoroughly plan and consider possible circumstances prior to setting up the ILIT.  As is often the case, the key to estate planning is planning.

Give us a call at (704) 784-0846 and let us help you access your needs and begin or modify an estate plan today. Or contact us to set up a consultation.