An Irrevocable Life Insurance Trust (ILIT) allows for a grantor to have a life insurance policy on their life and for a trust to be the owner and beneficiary of the life insurance policy. This allows for the life insurance proceeds to not be included in the grantors/life insured estate at their passing.
| Onetime Set up Fee | $750 |
| Annual Fee | $3,000 (for one life insurance policy) |
| Additional Annual Fee | $500 (for each extra life insurance policy) |
ILITs have had a very long and storied career in estate planning strategies. Their usefulness for all of us have ebbed and flowed based on the estate tax exemption amounts. For anyone with an estate (e.g. the value of your assets when you pass away) larger than the current federal tax exemption amount, an ILIT may be a good solution. As always, the cost of creating an ILIT, maintaining it, the ILIT trustee fee schedule and paying for the life insurance all go into deciding whether they are practical. Below is a chart how of an Irrevocable Life insurance Trust should be administered during the lifetime of the life insured.
When the estate tax exemption was $600,000 in 1997 and the top estate tax rate was 55% the use of ILITs were rather popular. In 2020 when the estate tax exemption is $11.58 million and the top estate tax rate is 40% an Irrevocable Life Insurance Trust usefulness for 99% of American’s is very small. However there are still many legacy ILITs in place that need either updates on the held life insurance and the proper maintenance of trust administration.
|
Year |
Estate Tax Exemption |
Top Estate Tax Rate |
|
1997 |
$600,000 |
55% |
|
1998 |
$625,000 |
55% |
|
1999 |
$650,000 |
55% |
|
2000 |
$675,000 |
55% |
|
2001 |
$675,000 |
55% |
|
2002 |
$1,000,000 |
50% |
|
2003 |
$1,000,000 |
49% |
|
2004 |
$1,500,000 |
48% |
|
2005 |
$2,000,000 |
47% |
|
2006 |
$2,000,000 |
46% |
|
2007 |
$2,000,000 |
45% |
|
2008 |
$2,000,000 |
45% |
|
2009 |
$3,500,000 |
45% |
|
2010 |
$5,000,000 or $0 |
35% or 0% |
|
2011 |
$5,000,000 |
35% |
|
2012 |
$5,120,000 |
35% |
|
2013 |
$5,250,000 |
40% |
|
2014 |
$5,340,000 |
40% |
|
2015 |
$5,430,000 |
40% |
|
2016 |
$5,450,000 |
40% |
|
2017 |
$5,490,000 |
40% |
|
2018 |
$11,180,000 |
40% |
|
2019 |
$11,400,000 |
40% |
|
2020 |
$11,580,000 |
40% |
The process begins when Joe, let’s say, decides he wants life insurance on his life but wants the proceeds to be enjoyed/used by his wife, Judy and potentially his children. He works with his estate planning attorney and they create an ILIT also known as an Irrevocable Life Insurance Trust. It will be the owner and sole beneficiary of Joe’s life insurance policy. Very importantly, the trust via the actions of the trustee will pay for the annual life insurance premiums. This means that the trust administrative work for the trustee is very little but very pivotal. As such the ILIT trustee fee schedule should match the little amount of work. There are a few details which many individual trustees miss or just don’t know – the trust must pay the premium and Joe makes a gift to the trust below the annual gift exclusion amount which for 2020 is $15,000. If the annual premium is larger than $15,000 Joe needs to file a gift tax return with the IRS so that his lifetime annual exclusion amount is being accounted for properly. Unfortunately, many ILITs do not follow the payment process of the life insurance premiums along with the Crummey notices and beneficiary signatures required. This can run afoul of the IRS rules and potentially bring back the ILIT into Joe’s estate. One can make the argument that paying for ILIT trust administration with a corporate trustee under a reasonable trustee fee schedule is a good solution. As they say, if you are not going to do it right, then why do it at all.
