WP Stevenson & Companies

Irrevocable Life Insurance Trusts are generally used as a necessity to keep Ownership of a Life Insurance Policy at an arm’s Length transaction from ones own personal property and thereby avoiding inclusion of Life Insurance death benefit proceeds from one’s taxable Estate.

Ownership of Life Insurance is often an integral part of the Estate Planning process. Life Insurance proceeds are used to pay the Estate taxes that are due upon the death of the last survivor of a husband and a wife.

By its very nature, an Irrevocable Trust cannot be revoked. The benefit in this is that once an asset has been granted to this type of Trust it can no longer be considered as part of ones taxable estate, thus clearing the way for gifts to be made to the ILIT.

The Trustee of the ILIT will now use the gifted proceeds it receives to pay premiums on the Life Insurance Policy issued on the life of the grantor of the proceeds to the ILIT. The ILIT will also serve as beneficiary of the Life Insurance benefits on the life of the Grantor.

Once Life Insurance death benefit proceeds have been received by the Trust, it is then the responsibility of the Trustee of the Trust to distribute the assets according to the terms and conditions set forth when the trust was executed.

There are several provisions that must be observed as part of the normal protocol when using an ILIT.

Perhaps the single most involving is that known as the “Crummey” provision which got its name from the Supreme Court case of Crummey vs. the IRS. In the shortened form, each year when the Grantors make a gift to the trust, a letter must accompany that gift to each beneficiary named within the trust. This letter gives the beneficiary the opportunity to take his share of the gift and use it now as a gift of present value. If the benefactor decides not to use the money he will have typically 30-days to disavow the gift as one of present value for one of future interest. The benefactors will sign a letter making clear the intent of the gift and thereby legitimize the transaction in the eyes of the IRS.

ILIT’s are typically used because they can be trusted to do what they are supposed to do. A simpler method that can have the same result is simply to have the Life Insurance policy owned by an Adult child. The net result is the same. Some families will have to use the ILIT because they cannot trust the children to perform and find the ILIT more reassuring.