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Among all the financial products consumers buy, life insurance is one of the most common. And with good reason. It provides consumers with an invaluable and highly cost-effective source of funds for loved ones. These funds may be used to replace a breadwinner's earnings, to ensure an important family goal---such as a college education--- is achieved, or to pay final expenses, such as taxes and burial cots.

Yet, unless we exercise care, life insurance can create as many estates planning problems as it solved.What estate planning problems can life insurance create?
Everything owned in our name at death is includable in our estate by the government for estate tax purposes. That includes the death benefit proceeds of our life insurance policies. When you consider that policies often provide death benefits in the hundreds of thousands of dollars, it's easy to see how a life insurance policy may have a significant impact on our estate tax liability.There's another estate planning problem that life insurance may create.An essential part of wise estate planning is deciding not only who our heirs will be, but also how, when, and why they will receive our legacy. Remember, though, that life insurance provides an immediate and often considerable payout of cash to your beneficiaries. And that can create many problems.Even adults with experience managing their finances may find that the sudden windfall of money from your life insurance policy is overwhelming. But the challenge may be magnified many times over if your beneficiaries are young adults without the maturity or experience to make wise financial decisions. Finally, if young children are your beneficiaries, they won't be able to receive the proceeds outright. Instead, the funds may be held in trust for them with an adult managing the trust on their behalf.That's why sound estate planning should include strategies that will help you control how, when, and why the proceeds of your life insurance policy are disbursed to your beneficiaries.Are there other issues we should be aware of with life insurance?
Yes! If your beneficiary is a recipient of benefits under a government program, such as Medicaid, for example, then the proceeds from your life insurance policy could make your beneficiary ineligible for further benefits.Without careful planning, your beneficiary will have to use up the policy's proceeds on basic needs, and will only be eligible for government benefits once all the money from your life insurance has been spent.This issue isn't just a concern for elderly beneficiaries. Any beneficiary now on Medicaid, or a similar government aid program, is also at risk.For these beneficiaries, you'll want to control ownership of the life insurance policy's proceeds and manage how they are spent. For example, you won't want your beneficiary to own them outright. In addition, the proceeds shouldn't be used to buy food, shelter, or clothing for your beneficiary. But they can be spent on you beneficiary's education, entertainment, vacations, a home health aide, or other medical treatment or expenses that Medicaid---or some other government program---doesn't cover.If we own a cash-value life insurance policy in our own names, can creditors seize it?
Possibly. In some states, creditors can seize all the cash value of a life insurance policy you own in your own name to settle a claim they may have against you. In other states, however, part or all of your cash value may be protected.Can the Irrevocable Life Insurance Trust (ILIT) help solve these problems?
The ILIT is an effective took for addressing all the problems we just discussed. Here are some of the benefits an ILIT can help you achieve for yourself and your family:

• It will reduce the size of your estate, and thus your estate tax liability.
• I may reduce the amount of insurance coverage you need, since your estate tax bill will be lower.
• It will help you protect the cash value of your life insurance policy from creditors.
• It will allow you to control, when, how, and why your beneficiaries receive the proceeds of your policy.
• It will help you protect the benefits of a beneficiary who is on government aid.

What exactly is an ILIT?
An ILIT, like most trusts, is simply a holding device. It owns your life insurance policy for you, removing it from your estate. As its name suggests, the ILIT is irrevocable. That means once you've created it and placed an insurance policy inside it, you can't take the policy back in your own name. But you can closely control many other aspects of the ILIT. For instance you can dictate who your initial beneficiaries will be, and you can define the terms under which they will receive benefits. You can choose the Trustee (or Trustees) who will manage your ILIT. It's all up to you.An ILIT provides you, your loved ones, and your estate with considerable advantages. But these benefits can only be achieved if the ILIT is designed properly and specific guidelines are followed carefully. We discuss the steps you'll need to take in detail over the nest few pages.What's the first step?
The process will begin when you sit down with our law firm and provide us with important information that will be used to design your ILIT. For example, as described above, you'll tell us who you want to be your beneficiaries, You'll name your Trustees, and you'll tell us under what circumstances you'll want your beneficiaries to receive money from the ILIT.What conditions can we establish for policy distributions after our deaths?
It's really up to you. You can, for instance, have the policy's proceeds paid out immediately to one or all of your beneficiaries. Or you can specify that your beneficiaries receive monthly or annual distributions. You may even dictate that beneficiaries receive money when they attain certain milestones. For example, you can provide for a large distribution when a beneficiary graduates from college, buys a first home, marries, or has a child. You can also build in flexibility, so that your Trustee has the discretion to provide distributions when your beneficiary needs it for a special purpose, such as starting a new business, or even a once-in-a-lifetime investment opportunity.If your beneficiary is on government aid, your Trustee can carefully control how distributions from your policy are used in such a way as not to interfere with your beneficiary's eligibility to receive government benefits.The point to remember is this: You have the opportunity to carefully control how, when, and why your beneficiaries receive the proceeds of your life insurance policy. That gives you the power to ensure that your policy is used in the best possible way on behalf of your loved ones.Who should we name as beneficiaries?
Again, the choice is completely up to you, although most people name their children, grandchildren or other close family members.Who should serve as our Trustee?
With many types of trusts, it's perfectly fine for you or your spouse---or both of you---to serve as your own Trustees. But that's not the case with the ILIT. If you or your spouse are an insured of a life insurance policy that is owned by an ILIT, and you also serve as the Trustee of the ILIT, then the IRS may decide that the policy hasn't left your estate after all. Instead, the IRS may count it as part of your estate, which can impact your estate tax liability.A better solution is to ask a trusted professional advisor to serve as a Trustee. A financial advisor, for example would be an appropriate choice. Of course, you may name more than one Trustee, so you may also want to name a family member as a Trustee. If your spouse is not an insured, he or she may serve in this capacity. That way, you can be assured that your family's goals are met while also under the expert guidance of a professional.Also, consider that the Trustee you name today is just as mortal as you are. Death or disability may make your Trustee unable to serve in that capacity someday in the future. For that reason, you should probably also name a successor Trustee in case your first choice is no longer able to help you.What does the Trustee do?
The Trustee manages the ILIT for you on your behalf. Your Trustee will follow your directions, as you've initially set forth in the ILIT's documents. While you and your spouse live, your Trustee will take the money you transfer to the ILIT each year and use it to pay your insurance premiums. Your Trustee may also oversee such administrative duties as the annual notification to your beneficiaries (called a "Crummey Letter"), and the filing of the ILIT's tax return, if necessary.Once you've passed away, your Trustee will oversee distribution of the policy's proceeds, according to the directions you've provided.What's the next step in setting up our ILIT?
Once you've worked with your estate-planning attorney to draft your ILIT, named your beneficiaries and your Trustee (or Trustees), the nest step is to acquire a life insurance policy. You'll go about this process just as you would normally, except that the owner and beneficiary of your policy will be your ILIT. Also, you won't pay the insurance premiums directly. Instead, your Trustee will handle the actual transaction of paying your premiums to the insurance company.What kind of policy should we use for our ILIT?
You can use an individual life policy---that is, one that insures the life of just one individual. Or, if you and your spouse are both living, you can use a second-to-die (also known as a "survivorship") policy. This kind of policy pays out a death benefit only after both spouses have passed away.Just remember, however, that if you and your spouse are both covered by an insurance policy owned by your ILIT, neither of you can serve as Trustees.Can we use an existing policy?
Yes! Just remember that if you die within three years of making the transfer, the IRS will include the policy in your estate for estate tax purposes. Also, there are gift-tax considerations if an existing policy is used for an ILIT. Despite these issues, however, you may still find that transferring an existing policy from your estate into an ILIT is well worth it.How do we make the premium payments each year?
Each year you will transfer enough cash to your ILIT to pay your annual insurance premium. Once you've made the cash transfer, your Trustee will send your payment on to your insurance carrier in time to keep your policy in force.A long as your premium payment follows the "gifting" guidelines, as described below, there will be no gift taxes incurred by either you or your beneficiaries.What are the rules for "gifting"?
The ILIT works so well because it takes advantage of the tax break allowed for gifts called the annual "gift tax exclusion".Each year, you may give away up to $10,000 to an individual completely gift-tax free. You can give $10,000 gifts, as adjusted for inflation to as many people as you like. A married couple can give an individual a combined $20,000 annually, gift-tax free. There is no limit to the total number of gifts the couple may make.You may, of course, give someone more that $10,000 a year. The excess can be applied toward your lifetime estate tax exemption of $625,000.The last remaining requirement for the gift tax exclusion is that you must give away a "present interest" in your gift. That is, the recipient of your gift must have access to it now, not sometime in the future.Each year, the annual premium payment you make is considered a gift to the beneficiaries you've named for your life insurance policy. As long as the premium payments equal no more than $20,000 per beneficiary (assuming that both you and your spouse are making the gift), no gift taxes will be due.As you might imagine $20,000 per beneficiary buys a lot of life insurance. The fact is, you probably won't spend anywhere near this amount on your annual life insurance premium. So, you may very well have money left over that you can give to your beneficiaries in other ways each year.What is a "Crummey Letter"?
A so-called Crummey Letter is an important ingredient in making your ILIT work as a gift tax-free tool for your beneficiaries.A moment ago, we said that for the gift tax exclusion to apply, your premium payment had to be a gift of a "present interest". Gifts of "future interest", such as money you might put in trust for a child, are not entitled to a gift tax exclusion. You might think that premiums paid for an insurance policy your beneficiaries will receive someday in the future are also gifts of "future interest" and thus, not eligible for the gift tax exclusion.Fortunately, you can qualify for the gift tax exclusion on your insurance premium each year as long as you send your beneficiaries written notice of what you've done. This written notice is called a "Crummey Letter", named after the individual who challenged the IRS and won the right to apply his annual insurance premiums toward his gift tax exclusion.The Crummey Letter must be sent to our beneficiaries to notify them when you've deposited money into your ILIT. It must also give them a specific period, usually 30 days, to withdraw this money from the ILIT. If, after 30 days have elapsed and the beneficiaries of your ILIT have left the money in place, your Trustee is then free to use the funds to pay your annual insurance premium.As simple as it sounds, the annual Crummey Letter plays an important role. It ensures that your annual premium payments are gift tax-free.What other requirements are necessary to keep the ILIT in force?
Once your ILIT has been set up and your life insurance policy acquired, there's generally very little that needs to be done in the future. Each year (or as long as premiums are due), you'll transfer cash to the ILIT, the Trustee (or your attorney or CPA) will notify your beneficiaries of that fact the Crummey Letter, and then the Trustees will wait the proscribed time to see if the beneficiaries of your ILIT withdraw the money. When they don't, your Trustee will send the premium payment on to your life insurance company.In addition, your ILIT will need a separate tax ID number, and a separate bank account may be necessary. In some cases, you may need to file a gift tax return. Finally, if your ILIT has earned income during the year, it may require a tax return. We will advise you whether these requirements are necessary in your situation, and if so, can help make sure they are fulfilled.Will my life insurance policy be subject to probate?
No, as long as you're beneficiary is not your estate. Once your survivor (or professional advisor) has provided your insurance company with proof of your death, the policy's proceeds are paid out directly to you're beneficiaries. This payout generally occurs quickly, privately and usually with no legal expenses involved. Furthermore, the death benefit of your policy passes income tax free to your beneficiaries.Remember, however, that your policy is not completely tax-free. The proceeds from your policy are included in your estate for estate tax purposesIs an ILIT-essential?
There's no law that says you've got to have an ILIT. But if you now have a taxable estate, or may sometime in the future, then an ILIT is the best way to reduce the estate tax liability created by your life insurance. Also, remember that the ILIT gives you tremendous control over how your insurance proceeds are used by your beneficiaries. Many clients who don't have taxable estates use the ILIT just to manage how their loved ones use their policy's death benefit.What about putting our life insurance policy in someone else's name?
You wouldn't be the first to try this estate planning shortcut. But you may find that it takes you where you don't want to go. Here's why prudent planners usually caution against it.When you give up ownership of your life insurance policy, you give up control. And that can often lead to unintended consequences. Say, for example, that you decide to assign your life insurance policy over to your grown son, who is also the policy's beneficiary. True, you've removed the policy from your estate. But you've also set into motion other potential problems. Here are, for example, just a few of the things that might go wrong under this scenario.If your son is sued and gets into debt, his creditors could seize any cash value in your policy to satisfy their judgment against him. When your son eventually received the full death benefit, it too could be lost to satisfy a creditor's judgment.If your son were to get divorced, the policy may become subject to the divorce settlement. Your former daughter-in-law could end up with half the policy's cash value or half its death benefits. (Depending on your son's state of residence and the debtor protection it may provide.)Should your son die before you, your life insurance policy would become part of his estate, and its ownership could be passed on to someone you don't know or don't like, with little you could do to stop it.Then, there's the issue of gift taxes. If your policy had a sizable cash value when you transferred it into your son's name, or if you continue to make the premium payments each year, gift taxes may be due.We could go on, but you get the idea. Putting the ownership of your life insurance policy in someone else's name is generally not the solution to your estate planning goals.How do we keep our beneficiaries from withdrawing the money intended to pay the premiums each year from the ILIT?
Clearly, the ILIT works best when you have the cooperation of your beneficiaries. So, you'll no doubt want to discuss this strategy with them ahead of time, before you actually go through with the creation of your ILIT. If they understand that this estate- planning tool is helping you all achieve important family goals; they will be much more likely to follow your wishes in the future.Of course, there's nothing you can legally do to stop them from withdrawing the funds you transfer to the ILIT each year, and that leads us to the next question.What if we decide we don't want to keep the ILIT in force any longer?
There's nothing requiring you to continue making insurance payments. Depending on the kind of policy your have, your policy may lapse as soon as you miss your annual premium payment. Or, if your policy has cash value, these funds may be used to pay premiums until all the accumulated cash is exhausted.The one thing you cannot do, however, is transfer a policy owned by an ILIT into your own names. So, if you think that you may need to do so someday, or if you will want to access the policy's cash value for your own purposes, you probably should reconsider the ILIT as a suitable strategy for you.What do we need to do to get started?
First, make an appointment to review your estate planning objectives with our law firm. After we've learned more abut you and your family situation, we'll be able to recommend the best course of action that will help you achieve all your goals. If an ILIT makes sense as part of your estate plan, then we will help you with this important process from beginning to end.

• MARRIED COUPLE, No Estate Planning
• LEGACY
• TAXES DUE
  1999
• TAXES DUE
  2000
• $1.5 Million =
• $353,750
• 210,000
• $2 Million =
• $578,750
• 435,000
• $3 Million
• $1,088,750
• 945,000
• $4 Million
• $1,638,750
• 1,495,000
• $5 Million
• $2,188,750
• $4,795,000
• $10 Million
• $4,938,750
• 4,795,000

• MARRIED COUPLE, Basic Estate Planning
• LEGACY
• TAXES DUE
  1999
• TAXES DUE
  2000
• $1.5 Million =
• $95,000
• 0
• $2 Million =
• $300,000
• 0
• $3 Million
• $762,500
• 435,000
• $4 Million
• $1,295,000
• 945,000
• $5 Million
• $1,845,000
• $1,495,000
• $10 Million
• $4,595,000
• 4,245,000

Here are examples of how an ILIT can save thousands of dollars in estate taxes. As you can see below, the estate of Bill and Mary Jones is $2,200,000 as long as they own their life insurance policy directly. If it is in their estate when they die, their estate taxes will be $387,500, and their heirs will inherit only $1,812,500, instead of the $2,200,000 estate they could have left behind with proper planning.

• Without an ILIT
• Equity in Home:
• $500,000
• Retirement Fund:
• $400,000
• Other Investments:
• $200,000
• Personal Property:
• $80,000
• Collectibles:
• $20,000
• Life Insurance Policy:
• $1,000,000
• Total Estate:
• $2,200,000
• Estate Tax Exemption:
• $1,250,000
• Net Taxable Estate:
• $950,000
• Estate Taxes Due:
• $387,500
• Total Inheritance:
• $1,812,500

With an ILIT
When Bill and Mary create an ILIT and transfer their life insurance policy to it, they reduce the value of their estate by $1,000,000. After their estate tax exemptions are applied against the balance of their estate the remaining $1,200,000 will pass to their children estate tax free. Their children will also inherit the $1,000,000 policy directly from the ILIT, also estate-tax-free. When Bill and Mary use the ILIT as part of their estate plan, their children receive an inheritance of $2,200,000.

• Their Children Will Inherit:
• From Bill & Mary's Estate:
• $1,200,000
• From the ILIT:
• $1,000,000
• Net Taxable Estate:
• $2,200,000
• Estate Taxes Due:
• $0
• Total Inheritance:
• $2,200,000

Here's another example of how an ILIT can help reduce estate taxes.Without an ILIT
At Bill's Death: At the time of Bill's death, Bill and Mary have an estate worth $930,000. His estate tax exemption is used to pass $625,000 on to their children, while Mary inherits the remaining $305,000 estate tax-free through the Unlimited Martial Deduction.

• Equity in Home:
• $150,000
• Retirement Fund:
• $200,000
• Other Investments:
• 50,000
• Personal Property:
• $20,000
• Collectibles:
• $10,000
• Life Insurance Policy:
• $500,000
• Total Estate
• $930,000
• Bill's Exemption:
• $625,000
• To Mary:
• $305,000

At Mary's death: In 2000 when Mary dies, the value of these assets has grown to $875,000, including the value of a $350,000 life insurance policy. Because Mary owns this life insurance policy at the time of her death, the children's legacy will be reduced by $95,000 in estate taxes, for a net inheritance of $1,405,000.

• Equity in Home:
• $250,000
• Retirement Fund:
• $75,000
• Other Investments:
• $150,000
• Personal Property:
• $30,000
• Collectibles:
• $20,000
• Life Insurance Policy:
• $350,000
• Total Estate:
• $875,000
• Mary's Exemption:
• $625,000
• Net Taxable Estate:
• $250,000
• Estate Taxes Due:
• $95,000
• Total Inheritance:
• $1,405,000

With an ILIT
If Mary uses an ILIT to remove the life insurance policy from her estate, she can avoid the $95,000 in estate taxes, allowing her children to inherit the full $875,000 from her estate. When combined with Bill's legacy, this gives Bill and Mary's children a total inheritance of $1,500,000 completely estate tax-free.

• Their Children Will Inherit:
• From Bill at his death:
• $625,000
• From Mary's Estate:
• $525,000
• From the ILIT:
• $350,000
• Net Taxable Estate:
• $1,500,000
• Estate Taxes Due:
• $0
• Total Inheritance:
• $1,500,000

Phase One: Establishing the ILIT

• Create Trust.
• Appoint Trustees.
• Name Beneficiaries.
• Apply for Policy.
• Second-to-die policy covers both spouses, pays benefits on second death.
• Individual Life policy covers only one.
• Pay Premium (notify beneficiaries with Crummey Letter).
• Check other possible requirements
• Set up separate account
• Obtain Federal ID Number

Phase Two: Maintaining the ILIT in Future Years.

• Transfer assets to Trust equal to life insurance premium due.
• Trustee (or professional advisor) sends "Crummey Letter" to beneficiaries.
• After a waiting period, Trustee pays premium payment of insurer.
• Check other possible requirements.
• File gift tax return.
• File tax return for trust if it achieved earnings.

Phase Three: After the Death of the Insured.

• Trustee notifies insurance company.
• When policy proceeds are received, Trustee supervises distribution according to the Trust document instructions.

• Estate Planning Benefits With The
  Irrevocable Life Insurance Trust
• Policy In
  Own Name
• Policy In
  Beneficiary's
  Name
• Policy In
  An ILIT
• Policy proceeds will be excluded from your estate for estate tax purposes.
• No
• Yes
• Yes
• Will protect cash value of policy from your creditors.
• No
• Yes
• Yes
• Will protect cash value of policy from your beneficiaries creditors:
• N/A
• No
• Yes
• Will provide you with ways to control how policy proceeds are spent:
• No
• No
• Yes
• Will prevent policy's ownership from being transferred to someone else should your beneficiary dies first.
• N/A
• No
• Yes
• May reduce the amount of insurance coverage you require:
• No
• Yes
• Yes
• Provides a way to remove assets from your estate each year through tax-free gifting:
• No
• Yes
• Yes
• Will protect government benefits of Beneficiaries eligible for aid programs.
• No
• No
• Yes

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