We recommend you reconsider how you plan to pass generational wealth to your heirs. Now is the time since the federal estate tax exemption allowance may soon be lowered. Senate Democrats propose lowering the current estate tax exemption from $11.7 million to $3.5 million for individuals and $23.4 million to $7 million for couples. Whether this Congressional bill passes into law remains unknown. However, allowable estate tax exemptions will likely change. Even if Congress fails to act, in 2026, the current rate sunsets. This cuts rates in half to about $6 million per individual. This blog post discusses ILIT Trusts. So, read on.
Wealth Management & ILIT Trusts
To address additional inheritance taxation, many consider an irrevocable life insurance trust (ILIT Trusts). You can use it as a mechanism to reduce estate tax. What’s more, such a trust pays your heirs part or the amount of your estate. Typically, the asset of the trust includes one or more life insurance policies. However, beware. Once an attorney creates an irrevocable life insurance trust, it cannot be rescinded, modified, or amended. Several important requirements apply to properly creating and maintaining an ILIT. Each requirement helps explain the nature of such a trust.
Trust Grantor
The trust grantor cannot simultaneously serve as a trustee. This is because a trustee controls the trust. Thus, this leads to the trust’s inclusion as a part of the estate. Make sure you name a trusted person or financial institution to act as a responsible trustee.
Look Back Rule
The owner of the life insurance policy must serve as trustee. If you transfer an existing policy to the trust and die within three years of the transfer, the policy becomes part of your estate due to a look-back rule. To avoid this risk, the trust may directly purchase a policy.
Crummey Power
The trust pays policy premiums. Also, the owner must transfer funds to the trust for just such a purpose. Oftentimes, this situation creates an issue with gift taxes because a transfer to a trust does not enjoy the yearly gift tax exclusion of $15,000. To qualify as a gift for a tax exclusion, the recipient needs to prove “present interest” in the money. To accommodate this requirement, they use “Crummey” power. This gives beneficiaries the ability to withdraw funds transferred to the trust for up to 30 days.
Crummey Letter
A Crummey letter notifies beneficiaries of an ILIT informs that a gift was made to the trust. What’s more, informs them of an immediate and unrestricted right to withdraw those assets for up to 30 days. After 30 days, the trustee can pay the annual insurance premium with the funds. However, in so doing, you run the risk that the beneficiaries will withdraw these funds. However, if you make it clear the financial benefit is greater in the future, this should not present a problem.
Trust Beneficiaries
Generally, the beneficiary of the life insurance policy is the trust. After the funds are deposited into the trust, the trustee can distribute the assets to the beneficiaries as specified in the trust. Beneficiaries who are still minors must understand they need to wait until they reach a certain age to collect assets. Leaving these in the trust protects them from beneficiaries’ creditors.
ILIT Trusts
ILIT’s can own both individual and second-to-die life insurance policies. All premium payments come from a bank account owned by the ILIT. The downside to an ILIT is that it is irrevocable. However, your ILIT can powerfully minimize your estate taxes. What’s more, it can help you avoid gift taxes, protect assets and government benefits, select the timeline of distribution to beneficiaries, and more. If you would like to discuss whether an ILIT may be right for you, give us a call. We would be happy to schedule a confidential meeting to discuss your needs.
About Skvarna Law in Glendora and Upland, California
Skvarna Law Firm operates offices in Glendora and Upland, California. Also, we provide legal services. We cover San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes several cities. Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Pomona, La Verne, Montclair, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma.
