Myths and Realities of Estate Planning – ILIT’s and RLT’s

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The purpose of this discussion is to review some of the myths and realities of estate planning. There have been a number of articles written on the subject but let's see if we can't put a different twist on it by keeping it simple. By dispelling some of the common misconceptions, we will better understand how important it is to take positive steps to keep our estate plans in order.

The Economic Growth Relief and Fiscal Reconciliation Act 2001 (EGTRRA) has thrown many people into a loop when it comes to estate planning. Tax laws are never straightforward, but EGTRRA has added a level of confusion rarely seen in advanced planning. For example, by 2011, the federal inheritance tax is expected to decrease, disappear and then come back to life. According to a Wall Street Journal article dated May 11, 2005, the "… current property tax law puts inheritance tax planners in an impossible position …". With such uncertainty, some potentially damaging estate planning myths surfaced. These financial “urban legends” stand in the way of prudent estate planning.

Myth. Due to the uncertainty of tax law, you should avoid using life insurance trusts.

The Irrevocable Life Insurance Trust (ILIT) is probably the most important insurance-related estate planning tool available to you. The irrevocable nature of the trust can provide inheritance tax savings, while insurance provides a cost-effective way to pay estate taxes (depending on age and health). The interest of an irrevocable life insurance trust is that the proceeds of the death of the policy are not included in the estate of the insured. If kept out of the deceased's estate, the proceeds of death will not increase the burden of inheritance tax. The irrevocable life insurance trust is a double winner because, not only is the proceeds of death outside the insured's estate, but the proceeds may be available to meet the liquidity needs of the estate.

To ensure that the life insurance proceeds will be excluded from the estate of the insured, two of the main requirements that must be met are that the insured must not have any assets. 39; property incidents in the policy and the trust must be irrevocable. Some people believe that when faced with the uncertainty of tax law, clients should avoid using ILITs. These same folks fear that once a policy is placed in an ILIT, the policy is forever locked in the trust, even in the unlikely event that the inheritance tax is repealed.

Nothing could be further from the truth. In reality, ILITs can be drafted flexibly. Some ILITs are currently written to give the trustee the discretion to distribute the cash value of the insurance policy to the beneficiaries of the trust during the life of the creator of the trust. This "escape" language enhances the flexibility of ILITs.

Myth. An estate tax reform, or repeal, would mark the end of charitable giving.

Giving to charity is emotionally rewarding. The IRS also gives you tax breaks for charitable donations. You can use charitable giving strategies as a technique to reduce or freeze the value of your estate. Some people have bemoaned the possibility of repealing or reforming the inheritance tax, saying it would significantly reduce charitable giving. The argument made is that if fewer estates are subject to inheritance tax, then fewer people will be inclined to make charitable giving as a strategy for reducing inheritance tax.

The numbers tell a different story. Since 2001, the amount of the inheritance tax exemption (the amount of property each person can leave free from federal inheritance tax) has more than doubled. According to the myth, increasing the amount of the inheritance tax exemption means that fewer people will be inclined to give to charity. The reality is that during the same time period, nationwide charitable giving has grown by almost $ 90 billion! If the myth was correct, how could it be?

The steady increase in charitable giving is premised on the fact that charitable giving is a grassroots effort. The vast majority of charitable donations are made by individuals. Private foundations and corporate giving are relatively small portions of the charitable giving pie. 77% of all charitable donations are made by individuals and there is no indication that this trend will reverse. America is truly a philanthropic country; reducing inheritance tax is rarely the primary motivator for donating to charity.

Myth. Revocable living trusts reduce taxes.

A revocable living trust is a separate legal entity that you create to own property, such as your house, other property, or investments. You transfer some or all of your property to the trust. Over the course of your life, you control trust; you can change the terms of the trust or terminate the trust at any time and take back ownership. Upon your death, the trust becomes irrevocable and can continue to exist for many years. People create living trusts because they are able to retain control over their assets while also achieving other goals, such as controlling the way and timing of asset distributions to heirs, insuring managing assets during periods of incapacity, avoiding probate and / or acting as a stand-in (among others). A common myth is that revocable trusts save taxes.

In reality, for tax purposes transfers to revocable living trusts are incomplete transfers for tax purposes and do not save any taxes. Revocable trusts can offer many other benefits to a trust creator, but tax savings are not one of them.

Myth. Estate planning is dead.

There is no greater myth than the mistaken perception that estate planning is dead.

Even though the federal estate tax has been repealed (which is highly unlikely), there are many reasons why we are continuing our estate plans. Some of them are:

  • Asset protection
  • Family business planning
  • Multigenerational planning
  • Privacy
  • Income replacement
  • Inheritance equalization
  • Dependents with special needs
  • Charitable donation

Life insurance is often a crucial part of many, if not all, of these estate planning goals.

Everyone has an estate plan; it's just a matter of how well your plan matches your goals. You owe it to yourself and your family to make sure your estate plan is in order. Conversation is good, but taking action is crucial. Commit to taking at least one step in your estate planning efforts over the next three days. It can be as simple as organizing your documents, compiling a list of your assets, and / or updating your beneficiary designations. If you don't have an updated will, you should make it a priority. You should also take steps to ensure that death benefit protection is structured in the most tax-efficient way to achieve your goals.


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