Estate Planning as a Career

The primary objective of an irrevocable life insurance trust (ILIT) is to remove the life insurance proceeds from appearing in the insured owner’s estate assets. Therefore, when the ILIT testamentary document is drafted, it should be ensured that the insured does not retain or hold any life insurance policies whose mention appears therein. Moreover, the insured should not possess any powers over the ILIT or its trustee that would result in the life insurance policy or the ILIT being included in the insured owner’s estate for tax purposes.

The ILIT bestows several other advantages to the estate owner. Some of these are described below.

Minimize the tax consequences of the three-year rule: Under certain circumstances a married grantor of the ILIT can minimize the payment of estate taxes associated with his estate assets. These circumstances include the case in which a married grantor, who has transferred a life insurance policy to the ILIT, dies within three years of the transfer. In such a case, the policy is included in the grantor’s estate. Further, the trustee can hold or pay the life insurance proceeds in such a way that qualifies for estate tax marital deduction.

If the marital deduction trust is a general power of appointment under section 2056(b)(5) of the ILIT rules, the following holds true. The surviving spouse can then be granted the right to withdraw the principal amount of the insurance proceeds and use it to make gifts to the deceased estate owner’s descendants.

In the same manner a QTIP trustee, who is an independent trustee, could be granted the power to make discretionary distributions of principal to the surviving spouse, who could then also make similar gifts.

Under section 2056(b)(7) of the ILIT rules, however, not even the surviving spouse can be granted a power to appoint the QTIP estate to anyone el (more…)