The Tax Cuts and Job Act of 2017 (TCJA) doubled the already sizeable estate tax exemption.
In 2018, indexed to inflation, the exemption is $11.2 million per individual and, with portability, $22.4 million for a married couple. This change reduces, by about two-thirds, the already small number of estates that will have to pay federal estate taxes. It is estimated that now only about 1,800 estates, annually, will be subject to this tax. Additionally, even those remaining estates still hit by the estate tax will see significantly lower tax liabilities.
The irrevocable life insurance trust (ILIT) has long been a fundamental strategy for managing federal estate tax liabilities. The popularity of the ILIT for estate planning purposes stems from its ability to shelter the proceeds of the life insurance owned by the trust from estate taxes while giving the grantor the ability to direct, in the trust document, how the proceeds are to be used and for whom.
A relatively small annual gift of the premium amount can be leveraged into a large liquid death benefit at precisely the time cash is needed to pay estate taxes and to preserve the assets of the estate. As a result, ILITs can be used to efficiently pass significant amounts of wealth to the grantor’s beneficiaries free of not only estate taxes, but income and capital gains taxes as well.
Due to the substantial reduction in estate tax liabilities, many of these trusts created for the purpose of offsetting estate taxes, are no longer needed. ILITs are sometimes created for other reasons other than taxes or can be repurposed, but many of these trusts may no longer be wanted.