April 25, 2021
What is an ILIT? | Irrevocable Life Insurance Trust
An ILIT is a type of living trust that’s specifically set up to own a life insurance policy. By setting up an Irrevocable Life Insurance Trust you can avoid Estate Taxes. Attorney and Advisor Chris Berry discusses “What an ILIT is?” in this episode of Daily Wisdom.
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Episode Transcript
What is an ILIT?
Hello, this is Chris Berry with Castle Wealth Group, and today we’re going to talk about what is an ILIT, irrevocable life insurance trust. And if you like this information, please make sure to subscribe to our YouTube channel, make a comment, whether you thought this was helpful.
Christopher Berry is a leading estate attorney and advisor in the area of retirement and legacy planning. He has been featured in publications such as Forbes, Kiplinger’s, Crain’s Detroit and more. He’s the host of the weekly radio show and podcast, The Chris Berry Show. He’s a national thought leader as it relates to retirement and legacy planning, and has authored the Amazon best selling book, The Caregiver’s Legal Guide.
So I had a question submitted the other day on our weekly wisdom webinars and someone asked, “What is an ILIT? I’ve read a little bit about it. Does it make sense in my situation?” So an ILIT, or irrevocable life insurance trust is a type of trust and there’s lots of different types of trusts out there. We have revocable living trusts. We have legacy inheritance trusts. We have castle trust. We have supplemental needs trust. We have charitable remainder trusts, and we have irrevocable life insurance trusts.
Now, we used to do a lot of irrevocable life insurance trusts in the past. And the reason a lot of people look to an irrevocable life insurance trust as a strategy is because by setting up an irrevocable life insurance trust, we can avoid estate taxes. Now why this used to be a big deal is that when you passed away, if you had more than $600,000 of total assets, anything more than that would be taxed up to 45 or 55% as what’s called the inheritance tax or the estate tax.
Life Insurance
Now over the years, that estate tax exemption has grown from 600,000 to a million, to a million and a half, to three and a half million, to five million. As of right now, with the Tax Cuts and Jobs Act, that estate tax exemption is at $11 million, and if you’re married, it’s at $23 million with inflation. So we haven’t done a lot of irrevocable life insurance trusts recently, because of the growing estate tax exemption. However, that estate tax exemption is set to drop down back to $5 million, whenever the Tax Cuts and Jobs Act expires, which is in 2025, or if not sooner, if Biden gets his wish and repeals the Tax Cuts and Jobs Act. And then also, Biden ran on a proposal of lowering the state tax exemption even further to three and a half million. So if you add up the value of your real estate, your business interest, your life insurance and all of that is greater than three and a half million dollars, you might want to consider an irrevocable life insurance trust.
And so what do is we purchase life insurance inside of a trust that’s removed from your estate for estate tax purposes. And then upon death, that life insurance goes, income tax free and estate tax-free, to your children or beneficiaries. So I had an individual asking about, what about Roth IRAs? Are those estate tax protected or estate tax exempt? And the answer is no. Roth IRAs are income tax protected, meaning that if you leave them to the next generation, your loved ones don’t have to pay any income tax, but they are not estate tax protected meaning Roth IRAs do count towards your estate tax. So if you do have an estate tax issue or question, then you’re not going to want to do Roth conversions instead. If there’s money left over, you might want to put that money into a irrevocable life insurance trust. So not only does it pass to the next generation income tax free, but also estate tax-free.
So if you do have a larger estate where you’re concerned about estate taxes, then a tool that maybe should be part of your estate planning or legacy planning arsenal is a ILIT, irrevocable life insurance trusts, where if there’s money set aside that you don’t think you’re going to spend, maybe we move that into the ILIT so that it can pass to the next generation estate tax-free as well as income tax free.
So hopefully that helped you understand the role that an ILIT plays in legacy planning. If you do have an estate tax issue, or you may have an estate tax issue in the future, an ILIT is a great tool to move some of your money from something that could be taxed, to now something that can go to the next generation tax free. If you like this information, please make sure to subscribe and comment on our YouTube channel. Thank you so much.
Castle Wealth Group has clients across the nation and helps families plan, protect, and preserve what is important by creating a retirement and legacy blueprint.