Brutally Honest Tips About The Irrevocable Life Insurance Trust

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I routinely get approached by wealthier folks who want me to help them establish their estate planning legal program. Part of the conversation that we have with the wealthier folks is the federal estate tax conversation.
Often these wealthier individuals tell me that a couple of their financial advisors have already discussed the possibility of setting up an irrevocable life insurance trust (ILIT) in order to cover the estate tax liability.
Twenty years ago, it seemed like everyone had an ILIT. This was back when the estate tax exemption was a mere $600,000 and the top estate tax rate was 55%. Today, with an estate tax exclusion amount of $11.58 million, far fewer estates are subject to the estate tax.
Nonetheless, the concept behind the ILIT hasn't changed. It's just being proposed to fewer people. The concept is that parents should make cash gifts into an irrevocable Crummey trust for their children. The trustee of the trust acquires and owns a life insurance policy (often a "second to die" policy) naming the parents as the insureds. Since the parents have no incidents of ownership in the life insurance, the death proceeds are excluded from the estate of the parents, and can be used to provide liquidity to the parents' estates to cover the estate tax liability.
For prospective law firm clients who want to schedule a free 15 minute initial phone call with Paul Rabalais, go to: go.oncehub.com/Paul8
This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.
Paul Rabalais
Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

Опубликовано:

6 авг 2024

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Комментарии : 63

@Zluke5750 4 года назад

I work in the finance industry and I find your videos to be incredibly beneficial. I have learned a ton from you! Thank you for taking the time to produce such informative content!

@americasestateplanninglawy1946 4 года назад

You’re welcome ZL 👍

@NeedsMoreToys 3 года назад

You didn’t mention that the trust manager for an ILIT, usually a bank, charges to maintain an ILIT. My widowed mother is now paying $1700 per year for an ILIT that only contains a paid up term life insurance policy. We’ve checked with other banks who charge more.

@marystilwell7418 4 года назад

Thank you...watching your vids...this is the kind of information that helps in the decision making process on the front end...appreciate your making the effort to make this available on YT...

@americasestateplanninglawy1946 4 года назад

Your comments, MS, make me happy 😃

@calvinthesandiegolawyer6061 3 года назад

Mr. Rabalais you should be an adjunct professor at a law school. Your videos are so informative and you're really good at distilling complex topics into layman terms. I appreciate all your videos!

@abow555 2 года назад

Love it. You explained everything

@FrankMalik2010 Год назад

I am a field underwriter. AKA Life Insurance agent. It is always great to take care of the clients first. I don’t bate in switch. It depends on the type of policy. If the client has an IUL or whole Life policy. They can benefit from the living benefits. I appreciate the honesty in the video.

@ksvarady 4 года назад

Very helpful video. Looking for one on a Dynasty trust next.

@johncarter8583 Год назад

There is another situation which was not addressed. When the estate is larger than the exemption, and the assets are not very liquid, ie, real estate or an operation business. In that case you need to set aside funds to pay for the inheritance tax on the amount above the exemption.

@TanSiDoan Год назад

I was going to say this. The life insurance helps with liquidity and not so much the dollar amount the kids get. When a loved one passes, the last thing you want the living to worry about is taxes and looking at what assets to sell. That’s a lot of extra stress.

@guyandoren 3 года назад

I think that he completely avoided the discussion of how these assets grow within the ILIT. My understanding is that they grow tax free and that therefore it is more advantageous than simply gifting children with $15K per beneficiary per parent while you live. In that scenario the gift goes into their personal accounts and is accessible by them and also taxable. Perhaps I'm wrong but if the proceeds of the life insurance investment compounds tax free, that could be a big benefit??

@ab2139 3 года назад

You are correct.

@victorbarton3039 3 года назад

He discussed using gifted assets (gifted tax free) to fund a tax free vehicle. triple tax relief…. power of LI

@sargeatlarge24v 3 месяца назад

My grandpa passed away in 2008 six months before my Dad died. My grandma passed away in 2019 and I received a laughable amount for what my family farm was. I was told that I owe over half in income tax so that must be the over 600 thousand 55% tax rule. Would the taxs be 2004ish law when the irrevocable insurance trust was found or 2025 tax rules which would mean I don’t meet the requirements now. The lawyer who’s told me this information is a shady character so I’m trying my best to learn as much as possible.

@phillip17 3 года назад

You aren't really stuck with a life insuracne policy though. If you dont' want to pay premiums anymore, you can simply change the policy to "Paid up". The premiums disappear, although the death benefit will be reduced also. It's not a surrender and it doesnt trigger any taxes.

@Tobarja 7 месяцев назад

You may not even need to do that. A loan from the cash value of the policy can pay that year's premium. Or, you can talk to your agent and have them adjust the premium for that year. Ask questions, get second opinions, your advisor for thing X may not know all the options for product Y.

@captainjennifer 4 года назад

Your videos are sure helping my grades at UCLA!

@americasestateplanninglawy1946 4 года назад

Very nice Cap’n. I believe you’re my first feedback from a Bruin! 😎

@personaltouchautodetailing1196 Год назад

Thank you

@bumblewhooo4303 2 года назад

Do you have an idea that maybe the life insurance will be tax in future? i really appreciate if you can answer my question thank you!

@bumblewhooo4303 2 года назад

I'm referring to second to die insurance policy if maybe will be tax in the future?

@Joanne94087 3 года назад

I assume that is a whole life insurance and WL builds up cash value. Withdrawing the cash value would not be taxed right? how about pay WL for 10 years and let the cash value to compound in the trust?

@marykelley5739 2 года назад

If I only have one beneficiary, can I just gift my asset to my beneficiary (by filing gift tax form 709) to pay for my life insurance policy? Then can I not even bother with setting up a trust?

@victorbarton3039 3 года назад

The Life insurance is great for liquidity, working on a case now he’s heavy into Real Estate.

@rel53 4 года назад

Thanks for the video. Almost everything here made sense to me but I am actually missing the basic premise. Why even do the irrevocable trust + life insurance to begin with? what is so special of doing a life insurance from within this type of trust vs say ... revocable trust? or just buy flat out a life insurance with beneficiaries being your kids? or In theory ... I can simply gift my kids the same money every year, while I am a live without any obligations. That too helps reduce the estate tax - no? I am missing the argument in favor... btw: the only part that i didn't fully agree with is: You rightfully mentioned that we are talking about real big estates (almost 22M). But you also mentioned that this is good till 2026 .. Good chance that the exception will only drop (someone needs to pay for COVID 19) - so while it sounds like waste of time now for most, there is a good chance it be much more relevant in the future. Should you not think and start preparing while young?

@pj5209 3 года назад

He fails to mention the true benefits of "gifting to an Irrevocable Trust" in an attempt to knock insurance agents. If structured correctly an Irrevocable Trust will allow you to move assets out of your estate (the asset grows outside of your estate and at death the asset does not flow into your estate); if you fund an ILIT with life insurance it can be extremely efficient (as the tax-free death benefit of the life insurance will eventually pay out, outside of your estate... = ding ding ding). Simply utilizing a Revocable Trust does not move assets out of your estate therefore at death all your assets + life insurance death benefit is in your estate with = wooops (you'll find a new T&E attorney really quick). Now onto the exciting stuff - as an individual you have an annual gifting exemption (an individual can gift 15K annually in 2020) and you have a life time exemption ($11.58mil in 2020); you can tap into your life time exemption amount while you are living (basically you CAN "gift" more than 15K to an Irrevocable Trust/ ILIT which he does not explain). And by structuring the ILIT appropriately and using strategies like GRATS or Gifting shares of your business or income producing assets to name a few- you can really stretch your dollars and protect your legacy and the "what' if's" (the thought of your family owing 4mm in unnecessary taxes at death knowing that they spent 30+ years of their life paying the highest income tax rates makes these HNW folks cringe (and turns my stomach too). This is the power of using an Irrevocable Trust. So the 11.58mil will sunset in 2025 and will come down significantly it appears. The current estate levels and economic situation presents unbelievable opportunities for the HNW right now (and not be penalized at death if the lifetime exemption is lower...) to your point @rel53, yes in a perfect world and within reason the sooner you get assets growing out of your estate the better.

@iantollefsen343 2 года назад

Yeah the biggest problem with this video is that it doesn’t tell you why one might use this strategy. Not to mention some of the statements are misleading. It’s a strategy to be used in specific circumstances but you would have no idea what they are because all he does is say why it’s wrong. More objectivity and less of his personal prejudices would be great. That’s my take anyway

@LtColDaddy71 3 года назад

You are good. Any ideas on bringing Bitcoin mined back when it was easy to do, back to fiat and not getting slammed?

@tomowcaest.5999 4 месяца назад

Which instance company? Having an LtC benefit ? Offshore or not ?

@bigtoeknee11 3 года назад

I plan on withdrawing from my 401k at 55yo under rule 55 (no penalty) and putting 6k in each of my 2 children's Roth IRAs. Taking out as much as I can within my tax brackets. If you have grandchildren do the same. Any additional funds I will convert to my own Roths )I think this is one of the best ways of passing on wealth tax free for them. Also how about funding a life insurance policy that your children own and take out on the parents? No trust needed and tax free as well?

@st751e 2 года назад

In your example, can Dave and Martha invest the cash value being accumulated in the life insurance? Or, will this violate the rules of the irrevocable trust?

@Tobarja 7 месяцев назад

The trustee can. See "The Dynasty ILIT (Irrevocable Life Insurance Trust)" by the channel Durfee Law Group.

@craigm5197 4 года назад

I have recently been reading about the use of ILITs to deal with (soften heirs income tax blow) as a result of the death of the stretch IRA for those with substantial tax deferred account balances as a result of how they saved for retirement. 2 Term policies in the ILIT??? until we Roth convert a bunch and shrink the income tax bulls eye our heirs could have versus an SGUL forever policy in an ILIT. Your thoughts appreciated.

@ab2139 3 года назад

Why would you put a term policy in an ilit?? There is a great chance that term policy would expire during your life timing and the funding of the trust has now gone away.

@craigm5197 3 года назад

@@ab2139 The question was based on the assumption that my estate would not be subject to estate taxes (less than $23M....current law anyway), but how could I deal with the large taxes my children could face when inheriting our IRAs should we die prematurely in the Secure Act era. Plan on converting at least until RMDs (13 years away) and the heirs tax problem theoretically shrinks (or at least doesn't get as large as fast) with each year we convert. So, I do that for 13 years and maybe the heirs tax problem is more palatable by then........so a term policy covers what I was exploring as a temporary need. Simply trying to explore the possibilities........now thinking (post-election) that TCJA sunset estate tax exemption values are a best case at this point......maybe a more permanent need for then two reasons. Second-to-die Guaranteed Universal Life inside the ILIT will likely be the better answer to handle both tax risks for the heirs (inherited IRA 10-year closure and estate tax law changes).

@ab2139 3 года назад

I think that with the exemption limits scheduled to decrease in the next few years, more the reason a permanent policy could make sense. The secure act has greatly changed the way retirement money should be spent/positioned in retirement. Roth IRA conversions are something to consider. If still working, it might be better off doing ROTH 401K at some level vs all pre-tax as well. Otherwise, your kids will lose a lot of the retirement money value because of the 10 year spend down/taxes. Happy to share strategies we’ve helped other clients implement.

@ldpy33 3 года назад

What if you borrow $900,000 from a $1mm life insurance policy and then transfer the policy to an ILIT and do not make any payments on the outstanding loan?

@pangvang136 Год назад

I want to know the answer to this also!

@tomowcaest.5999 4 месяца назад

Me too !

@privateland8929 4 года назад

Long story short is, don't use an ILIT for estate tax purposes. Instead, set up a trust and put everything in the trust. That way the trust can invest the funds and grow the corpus so the beneficiary of the trust can receive the dispersement according to the will of the trustor.

@Felixchang1 3 года назад

Thank you for the good information, I have a question, appreciate any input or comments : My wife and I bought a $1.5M life insurance 5 years ago. Annual premium $35.8K for 15 years. After we both pass away, it will pay $1.5M to our three daughters (1/3 each ). We are the owners of this life insurance right now. To avoid the estate tax, can we just change the owner names to our three daughters' names instead to setup Irrevocable Life Insurance Trust, The premium will be paid by my daughters 'account ( thru our annual gift to them). We are OK to leave the control to them. Could you let me know. Thanks.

@jeanneshannon5607 3 года назад

Did you get an answer from anywhere on your question?

@Felixchang1 3 года назад

@@jeanneshannon5607 Not yet

@jeromemostero9774 3 года назад

Hi Felix, I am a licensed life insurance broker, 21 years. Yes, you can change the ownership of your policy to your daughters and effectively remove the $1.5M asset from your estate. POSSIBLE PROBLEM: If the cash value exceeds $90K, which is your annual gift maximum, you may create a taxable event for your daughters. There are strategies to achieve your plan and avoid a taxable event. Here is a possible strategy, assuming your cash value is $150K: November 1st: Request a $75K loan from your policy. November 15th: Receive the $75K check and deposit in your bank account. November 20th: Change ownership of the policy to your daughters. ($75K in remaining cash value is below annual gift amount) January 1st: Write a check to your daughters for $75K plus interest. Note: To avoid what may appear to be an 'Arms-Length Transaction', money should stay in your daughters bank account for 30 or more days. February 5th: Your daughters can send $75K plus interest to the insurance company. (3 separate checks, but all together) I believe there is a better option, but difficult to explain on this type of platform. Also, unless you have a gross-valued estate exceeding $20M, you are not exposed to estate taxes. But, in 2024, the estate tax is set to reset to $5M, and this will cause many problems for people with large life insurance policies. I have advice on this as well. If you need help with this, let me know. Jerome Mostero - (949) 283-1900 Direct

@jeanneshannon5607 3 года назад

@@Felixchang1 Really informative..He has good presentation. Did you understand?

@Felixchang1 3 года назад

@@jeromemostero9774 Thank you so much for the explanations. Per my insurance table, the current cash surrender value is zero until year 10. I have one more question : After I transfer the life insurance owners to my three daughters, can the premium still come from my account, or I have to gift it to my daughters and they pay the premium from their accounts ? Thanks.

@m.s.9744 8 месяцев назад

Begins at 6:40

@smark2354 3 года назад

Not a fully knowledgeable advice on the actual insurance products. ILIT wise I am gaining knowledge

@iantollefsen343 2 года назад

If Martha still has 20 million exclusion left after Dave dies, how is her $60,000 gift to the trust a “taxable gift”? You are implying she will have to pay tax on the gift and she won’t, it will reduce her exclusion. Kind of an important distinction.

@edgonzalez186 10 месяцев назад

Why worry about estate tax if the life insurance is tax-free for the beneficiaries. Let the heirs decide what they're going to do when our final destination arrives. Trust are in case of young children, incapacitated or special needs heirs, or if you're riiiiich. Anything under 2.5mill could be covered with the LI death benefit. If you want to give in life.... take a loan out of the LI (permanent), and make it rain on your volchers... I mean, heirs.

@mercurynfo 4 года назад

Your living trust probably already provides the typical protections folks need-- creditor, remarriage, etc-- so no need for an ILIT. From what i can tell, ILITs are useless pre-mortem and only somewhat useful post-mortem as compared to a RLT. If you're someone who can afford a ~$10M insurance policy to hedge against the estate taxes on a $50M+ estate, then maybe there's an argument for an ILIT as the desire/need to exclude as much property (i.e., insurance proceeds) primarily rests with HNW individuals. So, if you're mere mortal below the current federal exclusion threshold of $11.58M (accounting for your spouse's unused portion DSUE), I'm quite certain that a well written RLT can handle insurance proceeds offering the intelligent control, inheritance equalization, and other protections most folks want. But, I welcome any inputs to the contrary.

@trindon9439 2 года назад

Who has to know your irrevocable trust exist?

@1414siamks 2 месяца назад

Y'all don't understand just how INSANELY INVALUABLE this video is. CPAs and lawyers get paid a lot to ensure this goes accordingly. Paul Rabalais explains by giving examples/scenarios. This is an excellent video.

@pwrhtr777 4 года назад

You are an excellent speaker and I enjoy these thought-provoking videos very much, but you should think about using Propranolol. I say this because I myself have some of the same issues I'm seeing with you when I speak in public (or to a camera)...inability to fully catch your breath at points, red cheeks/neck area, raised heart rate (120-140 bpm) and elevated blood pressure. This drug is a beta blocker and will not allow your heart rate to go above 70-80 bpm, so it could help you immensely. People tend to use it before giving speeches, so it's just some food for thought and maybe something to speak with your doctor about.

@mrcmdjd57 3 года назад

I hate life insurance agents almost as much as I hate so called "wealth managers."

@jeanneshannon5607 3 года назад

Why don't you like wealth nanagers?

@jeanneshannon5607 3 года назад

Managers

@Tobarja 7 месяцев назад

Irrevocable trusts can be unwound now, if necessary. See decanting. Your estate planner should know this.

@xiloeteknowledgiesllc1973 3 года назад

2:40 be careful of an advisor like this guy who consciously or unconsciously chooses his words to make the wealth appear separate from the individuals... Notice how he chooses his words "nevertheless" and "accumulated"... It's almost like he's doing you a favor to even consider an ILIT rather than plan for an inevitable reversal of government policies... This guy is halfway towards protecting your sovereignty and individuality but I would still call him a fence straddler...