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Margaret S. faced the ultimate thief.

She lost her husband to a sudden cardiac arrest.

Only 59, in seemingly good health, at least he had the foresight to place a million-dollar life insurance policy on himself, naming her as beneficiary. Referred to us by a friend, Margaret arrived at our first appointment shaken and afraid.

Not only was she grieving the loss of her life partner, she now faced a torrent of consequences from this sudden windfall of money.

The IRS demanded its sizable share of the proceeds to cover tax liability.
And creditors demanded the rest to pay off debts she didn’t even know her husband had.

How would she provide for herself and her three children?

I wish I could tell you this situation is uncommon. In fact, it is all too common.

More than half of all Americans do not have a will or an estate plan.
An unbelievable 92 percent of adults under age 35 do not have a will or estate plan.

Sadly, it was too late to help Margaret.

But it is not too late to help you.

The Smart Strategy

I want to introduce you to a powerful device called the Irrevocable Life Insurance Trust, ILIT for short.

Think of an ILIT as a holding device that owns your life insurance policy for you, thus removing it from your estate. Everything you own in your name at death the government includes in your estate for tax purposes.

Like its name, once you set up an ILIT, and place your life insurance policy(ies) in it, you cannot take them back, at least in your own name.

ILITs offer the flexibility you need to name beneficiaries, stipulate the terms by which they receive benefits, and you can choose the trustee you wish to manage this device. It is critical to design the ILIT correctly and to follow all guidelines.

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Solving Estate Problems

We strongly believe in the efficacy of ILITs to wipe away the messy problems that can stain the estate planning effort. Consider these beneficial solutions:

  • Reduces the size of your estate, which reduces tax liability
  • Lower estate tax bill may shrink amount of insurance needed
  • Protects cash value of life insurance policy from creditors
  • Controls circumstances of beneficiaries’ receipt of proceeds
  • Permits stronger protection/ management of proceeds to any beneficiary on government aid

Laws vary from state to state, so it is important to sit down with your attorney and us to determine what best fits your circumstances. We can assist you in:

  • Setting up the ILIT
  • Naming your beneficiaries
  • Identifying the proper trustee
  • Selecting the right life insurance policy
  • Shaping the circumstances for beneficiary receipt of money

Role of the Trustee

A brief word about the role of the trustee. He or she manages your ILIT and will follow your directions. Whatever money you transfer to the ILIT annually, your trustee uses it to pay insurance premiums. Your trustee handles a variety of administrative actions like the annual notification to beneficiaries (the “Crummey Letter”) and files the ILIT’s tax return.

Once we set up your ILIT, we will also help you make an informed choice on the right life insurance policy to place in the device. You may select an individual policy of a second-to-die (survivorship) policy. Remember, you do not pay the premiums directly; the trustee handles that for you.

The Incidentals

There are many smaller decisions to make in drafting your ILIT:

Whether you can use an existing policy; what to do regards gifting and the gift tax exclusion; and if your policy avoids probate, areas we explain in a private meeting.

What do you do if you don’t wish to keep the ILIT in force any longer?

Rest assured, you are not required to continue making premium payments. Your policy may lapse as soon as you miss your annual premium payment, depending on its type. If it is a cash value arrangement, the funds may be used to pay premiums until you exhaust all the accumulated cash.

A final word in this very brief tutorial.

Because you cannot transfer a policy owned by an ILIT into your own name, if you think you ever need to or need to tap the cash value, think carefully. The ILIT may not be a smart strategy for you.

Look forward to discussing an ILIT and other strategies with you in the future.

[Note: Margaret S. is a fictitious character created for purposes of illustration]

To Your Financial Freedom,

rick roush

Rick Roush AIF®, CPFA

The Roush Group

O: 559.579.1490 F: (559) 490-2015 C: (559) 285-3318