Happy Sunday!

Before I get to the good stuff I wanted to take a moment to wish you a Happy Thanksgiving!

I always love to take a minute around this time of the year to thank all of you for being a part of my life.

I really do appreciate you.

Okay, now let’s get down to business.

This is our third installment in everything ILIT (irrevocable life insurance trust).

By now you hopefully have an idea of how they work and some do’s and don’ts for success.

After last week’s email someone wrote back to me and mentioned they didn’t think ILITs would work with a term life insurance policy. So I thought it would be a good idea to run through the different scenarios where you might want to put a term policy into an ILIT and when you might want to do so with a permanent (cash value policy).

When it comes to term life insurance, there are two scenarios that might invite the use of an ILIT.

The first is if you know you have an estate tax issue (over $2.193m in WA) and you want to provide some liquidity to pay that tax when you die.

With a term policy you’d have as long as the term is to know you are covered in case something happens to you unexpectedly – and that coverage is at a significant discount.

The second is if you already have a lot of life insurance and it puts you way over the exemption amount.

For example, some of our clients have upwards of $5m of term life insurance to help take care of their family if something happens.

It’s usually a good value to park that in an ILIT for a small fee than to pay upwards of $720k of those proceeds in taxes (this is assuming your other assets are right at $2.193m).

That money, after all, is supposed to take care of your family, not go to the tax man.

Now, when it comes to permanent life insurance, the earlier you put it into an ILIT the better.

Here’s why – typically with permanent life insurance you pay relatively large sums into the policy and then it grows over time (maybe I’ll do another quick infinite banking run through next week).

For many a permanent life insurance policy is a great place to store cash as it grows safely and can be accessed while you are alive income tax free.

For people that fall into this camp it is always better to park that policy in an ILIT sooner rather than later.

If you do it sooner, as the policy grows it grows OUTSIDE of your estate (i.e. the amount of federal exemption you lose is smaller).

If you do it later, when you transfer the policy the cash value of that policy is considered a gift and will reduce your federal exemption amount accordingly.

Again, ILITs are great tools for the right person.

Hopefully this makes some sense, and if you think you might need something like this reach out to us for help – we’d be happy to chat.

Have a great week and a Happy Thanksgiving (and a reminder – we’ll be closed on Thursday and Friday this week)!

Cheers,

Christopher Small
CMS Law Firm LLC

PS – don’t keep this estate planning stuff to yourself – you know it’s important and we LOVE referrals!

PPS – note for CLIENTS – our office will be CLOSED December 25-January 1. If you are planning on waiting until the end of the year to get started or get done, don’t wait too much longer!