Ohio Farmer

Irrevocable life insurance trusts make a comeback

Country Counsel: As the federal estate tax exemption sunset draws near, ILITs may be used more.

June 5, 2024

2 Min Read
 Irrevocable trust document on a clipboard and gavel
ILIT: Once a staple for succession planners, use of ILITs decreased as the federal estate tax exemption increased. With more farm families facing taxable estates, legal counsel and financial advisers may need to use this tool. designer491/Getty Images

by Ryan Conklin

Trusts are an instrumental part of farm succession planning. With a dozen different varieties to choose from, trusts can be used in a variety of ways to accomplish plan goals.

As the federal estate tax exemption sunset draws near, the irrevocable life insurance trust stands to make a comeback. Once a staple for succession planners, use of ILITs decreased as the federal estate tax exemption increased. With more farm families facing taxable estates, legal counsel and financial advisers may need to use this tool.

Let’s pretend a succession plan calls for a $3 million life insurance policy. The family’s net worth is up against the applicable lifetime exclusion amount. If the life insurance policy is held in personal names, the full $3 million counts toward a taxable estate. This would push the family into costly estate taxes.

Alternatively, when setting up the life insurance policy, the clients could create an ILIT to hold the life insurance policy. If the policy is held in an ILIT, the death benefit of $3 million would not count toward their taxable estate. This election could provide an inheritance for an off-farm heir, take care of a surviving spouse, complete a business buyback, or inject capital into an estate to pay taxes or debt.

There are a few negatives associated with ILITs. First, the term “irrevocable” equals inflexible. There is no ability to change the beneficiaries of the ILIT after it is executed. If a family creates an ILIT, there needs to be a high degree of certainty surrounding its eventual beneficiaries and uses.

Second, the insured on the policy must continue to pay the premiums into the ILIT. This premium payment counts against the annual gift exclusion amount for the beneficiaries. In some cases, it may require the filing of annual gift tax returns. There is also a notice requirement to the beneficiaries each time a premium payment is put into the trust. These premium payments generally are not tax deductible.

ILITs require careful planning and management to execute properly. The assistance of proficient legal, tax and financial professionals is essential. Premiums that constrain cash flow on a farm are concerning. Younger couples might consider an ILIT early in their farming careers because of the cheaper premiums. As with other succession planning components, make sure the goals of your plan match the tools you are using.

Consult your succession planning team to determine whether an ILIT is the right choice for your farm and family.

Conklin is an attorney and owner of Wright & Moore Law Co. LPA.

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