I wanted to continue the discussion related to estate taxes by starting with one of the easiest estate tax strategies to employ.

This strategy is called the ILIT, or irrevocable life insurance trust.

Why is this the easiest?

First, the trust itself is relatively easy to put together (it often has the same distribution provisions as your revocable living trust).

Second, it’s really easy to figure out what to put into the trust, and there’s not a lot of math involved.

Before we get to that, though, a quick reminder related to estate taxes.

1. The federal exemption is $12.2m per person (you only pay tax on assets over that amount);

2. If you are married, when the first spouse dies you can give your federal exemption to your spouse by checking a box on a form (this is called portability);

3. WA state has its own estate tax – the exemption is $2.2m;

4. There is no portability of the WA state estate tax exemption (when spouse 1 dies, everything can go to spouse 2 with no tax – but when spouse 2 dies everything over $2.2m will be taxed);

5. Life insurance proceeds (whole life or term) count as part of your estate for estate tax purposes.

Remember all that?

Great! :)

If you already have a life insurance policy, the ILIT is great because you can simply transfer your current policy into the trust after you create it.

You would simply gift your premium payments into the irrevocable trust and the trust would then pay those premiums.

This effectively reduces your taxable estate by the amount of the life insurance policy (and the gifts you are making to the trust for the premiums).

If you don’t already have a life insurance policy, this is a great way to pay a discount on any estate tax you might be liable for in the future.

For example, you might determine you owe $100k of tax on your current assets.

Instead of paying that $100k when you die you could create an ILIT, fund it with a life insurance policy worth $100k and when you die the only true cost of that payment to you would be the life insurance premium (which is likely to be substantially less than the death benefit).

Hopefully that makes sense.

And I think that’s a good stopping point for now.

Next week?

How about some ILIT frequently asked questions.

Have a great week!

Cheers,

Christopher Small
CMS Law Firm LLC

PS – if you want some nuts and bolts estate planning and probate info you can see all of it on my YouTube channel – http://www.youtube.com/c/CMSLawFirmLLC

And PPS – if you need help with estate planning or probate the easiest thing to do is click the link and book a time to chat – https://cmslawfirm.com