New legislation is being introduced this year that could eliminate estate taxes completely. Yet, it is likely that if federal estate taxes are repealed, state death taxes and capital gains taxation will be increased.
In this environment of tax uncertainty, clients need estate planning and funding vehicles that provide flexibility.
The Irrevocable Life Insurance Trust (ILIT)
An ILIT is a trust created for the purpose of owning and serving as beneficiary of a life insurance policy. By placing the policy in the trust, you remove it from your taxable estate.
When death benefit proceeds are paid, they are paid to the trust. The result is a death benefit that is passed through the trust to your trust beneficiaries according
to your instructions and unreduced by estate and income taxes.
In today’s environment of estate tax uncertainty, flexibility can be built into the
trust to direct distribution of the life insurance funds in the event that estate taxes
are in fact repealed long term.
Another alternative is to structure the ILIT as a multi-generation trust. This allows for the life insurance proceeds to provide education and support for several generations in the event the proceeds are not needed for estate taxes.
The client is in effect able to create wealth.
However, the simple fact that the ILIT is irrevocable makes many clients choose not to have their insurance policy owned by the ILIT, at least until the outcome of estate taxes is more settled.
Columbus Life’s Solution
The Estate Protection Benefit Rider
This no charge four-year term benefit protects a policyowner/insured from federal estate taxes that may be incurred when a life insurance policy is transferred to a third party or Irrevocable Life Insurance Trust within three years of such transfer.
The coverage is not convertible and will equal 125% of the base Specified Amount.
The Estate Protection Benefit is available only if neither life has a flat extra rating. In addition:
1. If the older insured is age 71-75, one life must be equal to or better than Table D (the other life must be standard), OR
2. If the older insured is less than age 71, one life must be equal to or better than Table H (the other life must be equal to or better than Table D).
Clients can elect to own their life insurance policies themselves. If they should die while estate taxes exist, the life insurance will increase the net value of their estate and result in additional taxation.
If not for the three year rule, it might be acceptable for clients to risk inclusion of the life insurance in their estate for a short period to wait and see what new estate tax legislation may be passed.
What is the Three Year Rule?
If an existing life insurance policy is transferred to the ILIT, the insured must survive the transfer by at least three years. Otherwise, the death benefit will remain part of the insured’s taxable estate. If a new policy is purchased, it is important that the trustee apply for the policy on behalf of the trust and that the trust own the policy and be named beneficiary.
Columbus Life’s Solution
Survivorship life insurance meets a variety of challenges and offers a very important feature: it provides funds to your clients’ beneficiaries when they are needed most - upon the second death of the joint insureds.
Survivorship life insurance is cost effective. Generally, the cost for survivorship life (written on two lives) is less expensive than buying two separate policies. In addition, survivorship life may provide life insurance benefits for insureds who would otherwise be ineligible for a single life policy.
The Estate Protection Benefit rider protects your clients’ from the three year rule giving them time to carefully consider their options and have a trust drafted that meets all their needs.
