Page 22 - June2019_BarJournal

BarJournal ESTATE PLANNING

JULY/AUGUST 2015
FEaTUrE Ways to Revisit Irrevocable

Life Insurance Trusts

BY KATHERINE E. WENSINK

n the not too distant past, the Federal and loans funds received from the life insurance the individual would like to use the annual
Ohio estate tax rates were significantly policy to the estate. The estate then uses the premium payments for other investments or
higher and the exemptions were liquid cash to pay the estate taxes. The ILIT simply doesn’t have the funds to continue the
significantly lower. Twenty years ago, an retains other assets, such as the family business, gifts. Perhaps the cash value could be used to
i individual’s estate was subject to federal and lower estate taxes are paid overall, because fund children’s or grandchildren’s education.
estate tax at a rate of 55% on assets over $675,000 the life insurance proceeds aren’t included in Perhaps the children, minors when the ILIT was
and to Ohio estate tax at a rate of 7% for assets the individual’s gross estate. created, are now capable to serve as trustees.
over $200,000. Irrevocable life insurance trusts Today, the federal estate tax exemption is Perhaps the individual still has the funds to
(ILITs) were an effective way to pay the Federal $11,400,000 and Ohio no longer has an estate continue payment and the ILIT still makes sense.
and Ohio estate tax with assets that were not tax. This means an individual can transfer If that is the case, things can remain status quo.
subject to the estate tax. $11,400,000 without incurring any estate tax.
An ILIT is a tool in which an individual The ILIT is still a very effective tool in paying Reduce the policy to paid up value
creates a trust, then gifts money to the trust, the federal estate tax, however fewer people For the individual that does not want to or
usually annually. The annual gifts are typically need that tool. So the questions are whether does not have the ability to continue to make
subject to a demand right, which qualifies the the ILIT is still necessary and if not what does payments, this option allows the death benefit to
gift for the annual gift tax exclusion, and thus one do with it? be reduced based on the current cash value. This
not subject to the unified estate and gift tax is the best option if the ILIT is still desirable,
exemption. The trustee of the ILIT purchases Is the ILIT still necessary? the current value of the life insurance policy is
a life insurance policy on the individual’s life. A close review of the ILIT terms and the life not needed, and the individual does not want to
When the individual dies, the individual does insurance policy it holds will help determine make further payments. Upon the individual’s
not own the policy, so it is not part of the whether the ILIT is still a useful tool and death, there will still be a death benefit, but it
individual’s estate. If there is an estate tax due, whether the life insurance policy is the right will be less than if the premiums continued
the trustee purchases assets from the estate or policy. Perhaps, without the estate tax burden, to be made.

Sell the policy to a new ILIT
If the terms of the ILIT no longer meet the needs of
the family, the individual may create a new ILIT, and
the policy can be sold to the new ILIT for fair market
value. For example, if the original ILIT did not
include some of the grandchildren as beneficiaries,
the new ILIT would include all of the grandchildren.
The individual would gift the fair market value
to the new ILIT, and the trustee of the new ILIT
would purchase the policy from the old ILIT. The
old ILIT would now have cash that would be held
for or distributed to the old beneficiaries. The new
ILIT would hold the policy, and may even have
different beneficiaries. It is important to design the
new ILIT as a grantor trust (i.e. taxed as part of the
individual’s tax return) in order to avoid the transfer
for value rules of IRC Section 101.

Substitute trust property
ILITs are often grantor trusts, and one of
the grantor trust provisions is the power of
substitution. The ILIT should be reviewed for
22 | Cleveland Metropolitan Bar Journal clemetrobar.org