The annual insurance premium amount is typically contributed by the insured to the ILIT, subject to Crummey withdrawal powers (so named after a famous case) that give named persons (usually but not always beneficiaries of the ILIT) the power to withdraw all or a portion of the contributed premium amounts within specified periods (often 30 days or 60 days, but sometimes, under a so-called “hanging power,” on an annual schedule). There are lots of complications, nuances and details, but basically the ILIT allows an insured to purchase life insurance on his life that is held outside of his estate (but also outside of his access), permits the insured to treat the insurance premium payments as non-taxable gifts under the annual exclusion provisions of Code Section 2503(b), and provides safety and security to the trust beneficiaries while avoiding the diminution in wealth that occurs if the insurance proceeds are includible (and taxable) in the insured’s estate.

What’s not to love about the ILIT? Now for case studies.

Mid-40s And Creating Increasing Wealth
Let’s start with a young(ish) couple, Richard, age 42, and Sarah, age 37, who are married and have two children, ages 3 and 1. (Having children is a life-changing event that often transforms life insurance from an interesting abstraction to a top priority.)

In many cases, a young couple with children does not yet have a strong accumulation of wealth, and so “death insurance” is an attractive option, hedging the small but devastating consequences of an early parental death with a policy purchased at a comparatively low annual premium. In this case, however, Richard is an equity owner in a successful, privately owned technology company, and the couple’s combined net worth is now already over $15 million. Unfortunately, most of this wealth is tied up in stock in the technology company, which like all such companies is both illiquid and subject to ongoing risk. Working with their advisors, they decide to purchase life insurance policies held in two ILITs:

• The first on the life of Richard for the benefit of Sarah (and the children), anticipating Richard predeceases her.
• The second, a second-to-die survivorship policy, to provide liquidity to pay estate taxes on the death of the latter-to-die spouse.

On recommendations from their insurance advisor, they purchase two whole life policies:

• An individual policy on Richard’s life with these characteristics:
– Initial death benefit of $5 million, based on an annual premium of $74,000 for 23 years.
– Total premiums paid of $1,702,000.
– Total liquid income tax-free assets at age 80 of $7.3 million, IRR of 5.4%.

• A survivorship whole life policy on both lives, with these characteristics:
– Initial death benefit of $5 million, based on an annual premium of $41,000 for 23 years.
– Total premiums paid of $943,000.
– Total liquid, income tax-free assets at age 80 of $6.1 million, IRR of 5.75%.

These ILITs are especially efficient if Crummey withdrawal powers can cover the full annual premium amounts—which is not always easy to do in a small-sized family unless extended family members, or non-family members, are also given withdrawal powers. This is often a structuring possibility, (see e.g., Cristofani v. Commissioner), but beyond the scope of this article. Contact your “capable estate planning attorney” for further information.

Buy-Sell Agreements—Creative Estate Planning For Partners In A Small, Successful Cpa Firm
The traditional structure of a “buy-sell agreement” for a small private business is for either the entity or the business partners to agree to buy out the equity of a deceased partner, with the payment obligation often funded with life insurance. While these insurance arrangements offer timely funding for the surviving business partner(s), there are several problems with these classic arrangements, notably that the insurance proceeds go into the taxable estate of the decedent rather than being paid tax-free to an ILIT for the spouse and descendants.

The better idea may be for each business partner, instead of purchasing life insurance on the other partners, to purchase an insurance policy on his/her own life owned in an ILIT. By utilizing this simple but effective variation in the traditional buy-sell structure, the insurance proceeds can now pass tax-free outside of the insured’s taxable estate, leaving greater after-tax assets to the heirs.