Is It Time to Reconsider Your Estate Plan?

With potential changes to the federal estate tax exemption, now may be the perfect time to review how you plan to transfer generational wealth to your heirs.

Currently, the federal estate tax exemption is $11.7 million per individual and $23.4 million per couple. However, Senate Democrats have proposed lowering the exemption to $3.5 million for individuals and $7 million for couples. Even if this legislation does not pass, the current exemption is scheduled to sunset in 2026, effectively cutting it in half to around $6 million per person.

This looming change means that proactive planning could be crucial to minimize estate taxes and maximize the legacy you leave for your loved ones.

Using an Irrevocable Life Insurance Trust (ILIT)

One popular estate planning strategy is establishing an Irrevocable Life Insurance Trust (ILIT). This specialized trust is designed to:

• Reduce or eliminate estate tax liability
• Provide tax-free funds to pay estate taxes
• Ensure your heirs receive more of your wealth

An ILIT holds one or more life insurance policies as its primary asset. Upon your death, the proceeds pass to the trust beneficiaries as outlined in the trust document.

Key Rules for Setting Up an ILIT

Because an ILIT is irrevocable, it cannot be rescinded, modified, or amended after it is created. Careful planning and strict adherence to requirements are essential:

1. Choose a Trustee (Not Yourself)
   If you are the trust grantor, you cannot act as trustee. Doing so could cause the trust assets to be included in your taxable estate. Instead, appoint a trusted individual or financial institution as trustee.
2. Make the Trust the Policy Owner
   The trust must own the life insurance policy. If you transfer an existing policy into the trust and pass away within three years, the IRS will still count the policy as part of your estate. The safer option is to have the trust purchase the policy directly.
3. Fund Premium Payments Properly
   • You must transfer funds to the trust to pay policy premiums.
   • These transfers can create gift tax issues unless structured correctly.
   • To qualify for the annual $15,000 gift tax exclusion, beneficiaries must have a “present interest” in the funds.

   This is where Crummey powers come in: beneficiaries receive a notice (a “Crummey letter”) giving them the right to withdraw the gifted funds for 30 days. After the 30-day window passes, the trustee uses the funds to pay the insurance premium.

4. Distribution of Proceeds
   After the insured’s death, the trust receives the policy payout. The trustee then distributes funds according to the trust’s instructions. You can:
   • Delay distribution until beneficiaries reach a certain age
   • Keep assets in trust to protect them from creditors
   • Provide structured payouts over time

Benefits and Drawbacks of an ILIT

Benefits:

• Keeps life insurance proceeds out of your taxable estate
• Minimizes or eliminates estate taxes
• Provides liquidity to pay estate expenses
• Protects assets for beneficiaries
• Allows you to control when and how beneficiaries receive funds

Drawbacks:

• Irrevocable – once created, you cannot change it
• Requires ongoing administration and compliance

The Bottom Line

With federal estate tax exemptions likely decreasing, now is the time to revisit your estate plan. An ILIT can be a powerful tool to reduce estate taxes, protect assets, and ensure your heirs receive the maximum benefit from your life insurance policies.

📞 Contact us today to schedule a confidential consultation and learn whether an ILIT is the right solution for your estate planning goals.