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Leveraging the power of life insurance inside an irrevocable trust

January 12, 2022 / 3 min read

An irrevocable life insurance trust can be a beneficial estate planning tool for individuals and couples subject to estate taxes and a unique financial instrument for economic return. Are they right for you?

Life insurance is a common tool used by families to protect and provide for their loved ones. For many, it’s an important source of income replacement in the event of an untimely passing of a wage earner; for others, it can be a beneficial estate planning tool when combined with an irrevocable trust to hold the life insurance. Why do irrevocable life insurance trusts (ILITs) exist, and how can they provide leverage for affluent families looking for wealth transfer options?

When an individual passes away, their assets could be subject to estate taxes either at the federal level, the state level, or both. Many don’t realize that life insurance policies that are owned by the deceased individual are normally included as an asset and valued at the amount of the death benefit. For individuals or couples that are approaching or exceeding the allowable amount to pass estate tax-free, proper insurance planning is critical. In this scenario, an ILIT can hold life insurance outside of the taxable estate while still providing liquidity or leverage for loved ones.

For individuals or couples that are approaching or exceeding the allowable amount to pass estate tax-free, proper insurance planning is critical.

As the estate tax exemption amount increased over the last decade, the amount of clients that need life insurance for estate tax liquidity drastically decreased. However, today’s higher estate tax exemptions are temporary. Under current law, they will “sunset” and automatically cut in half for decedents dying after Dec. 31, 2025. The timeline could be accelerated, too, depending on tax legislation.

For clients with taxable estates, life insurance can be a unique financial tool that has benefits beyond the need to provide liquidity — it can also be used to provide a desirable economic return, and, coupled with the use of an ILIT, can compound the leverage of that asset. Here’s how.

It should be noted that this strategy isn’t for everyone. This tool should only be used by clients that have excess capital on their balance sheet because the life insurance isn’t liquid and won’t be liquid until the passing of the insured(s). Accordingly, it should only be used to leverage assets that would normally be passed to the heirs upon death so that the payout is aligned with the overall wealth transfer plan. And it should only be used by clients that see an estimated 4.5–5% after tax return as an attractive alternative to where that money would normally be positioned.

If you have any questions, please reach out to a member of Plante Moran Insurance Agency.

The material contained in the article is for informational purpose only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as (insurance professionals, financial planner, investment advisor, securities broker)

Securities are offered through Valmark Securities, Inc. member FINRA and SIPC, an unaffiliated securities broker-dealer.


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