anyone aware of downsides to ILITs?

[DrDan]

[mkultra]

1. what is an ILIT?

[DrDan]

2. a trust containing Life Insurance policies

you make a "gift" to the trust to pay the policy premiums. When you pass away, the benficiary gets the life insurance - but it is not a part of an estate - hence escapes the estate taxes.

So for example - if you and spouse have two children - a gift up to $52,000 could be made to the trust (each parent gifting $13K to each child) with no tax implications. That could be used to pay the premiums on a lot of insurance for the two children. The $52K comes out of the estate - and the amount paid from the life insurance upon death is not part of the estate. I could be used to transfer say a million to children without having that million being considered a part of an estate.

[A HERETIC I AM]

3. One of their best and more common uses is to pay estate taxes

on large asset amounts. If your net worth is large, such that estate taxes will be considerable, the Irrevocable Life Insurance Trust can be used to pay the tax liability by the heirs. It is a common strategy for high net worth individuals. The only downside that I can think of is that the premiums of the policy itself can be substantial, depending on the health of the insured. As a consequence, for people with high income potential, it is advisable to get qualified for and purchase life insurance at an early age because then you can't be refused later on.

Life insurance proceeds are generally not taxable and can be used in any way the beneficiary cares to use them. Settling Federal Tax Liability on inherited wealth is a perfectly sound use of the proceeds.

[DrDan]

4. thanks - that makes a lot of sense

I was actually thinking of it as a way to provide the life insurance via gifting of the premiums to the trust

[A HERETIC I AM]

5. You need to speak to a qualified tax attorney or CPA....

as the ins and outs of these types of trusts can vary state to state. Since you asked a relatively simple question; "What are the downsides?" I feel comfortable in giving you the answer I gave above. However, delving further into subjects such as gifting, etc. do indeed require answers from someone who both knows you and your situation, is qualified and/or certified to give such answers and is familiar with Trust Law in your state. Having said that, many of my former clients used such strategies to great effect.

Gifting to a trust can be a very effective tax lowering strategy if properly structured. There are several variations such as a Charitable Remainder Trust, Charitable Lead Trust and others. Here in Florida, Trusts are particularly effective because many of the laws regarding estates and inheritances tend to favor the elderly (Because we have so many retirees) as well as the fact that Florida is not a Community Property State.