The increased gift tax and generation skipping exemptions provided under the 2010 Tax Act provide a significant opportunity to transfer assets to family members. To take full advantage of these increased exemptions, many wealthy families have been advised to make substantial gifts before the end of 2012, when the increased exemptions are scheduled to expire.
While these gifts are typically made in trust, rather than outright, many clients are hesitant to make gifts, as they are concerned about the irrevocable nature of the trust. They fear that they may later regret their decision as their financial condition, the tax laws or other circumstances may change. However, an irrevocable life insurance trust (ILIT) can be more flexible. If structured correctly, it can better adapt to changing family circumstances and to future changes in tax laws while still preserving the intended tax benefits.
Trustee or Trust Protector Powers
Power to amend: It may be desirable to amend an ILIT in order to achieve better tax benefits or allow administration consistent with the grantor's intent. Clearly, the grantor cannot have the power to amend the trust agreement without adverse estate tax consequences.
Provisions to Add Greater Flexibility
Grantor Trust for Added Flexibility
Consideration should also be given to designing the trust as a grantor trust. If income-producing assets are gifted to the ILIT to pay premiums, the grantor's payment of the ILIT's income taxes will be the equivalent of a tax-free gift to the beneficiaries of the ILIT. The same favorable income tax result would occur if an ILIT sold an asset and incurred a gain on the sale.