This Trust Can Reduce Estate Taxes, Protect Hard-to-Sell Assets

Financial advisors who are used to working with highly liquid clients should still know enough about trusts to guide clients who turn out to have large, hard-to-sell assets.

Jennifer Li, a director of financial planning at EP Wealth Advisors, gave that advice in a recent email interview.

For the clients with liquid assets, simply having a life insurance policy pay benefits to family members may get the job done.

In other cases, “the estate may have difficult-to-sell assets, such as real estate or business interests,” Li said.

Financial professionals should make sure the clients with hard-to-sell assets know they can use life insurance to protect the assets, and that they can increase the flexibility and tax efficiency of the life insurance by putting it into an arrangement like an irrevocable life insurance trust, to keep the death benefits out of the estate of the insureds, Li said.

What It Means

To some advisors, the idea of trying to help clients with life insurance or financial planning without discussing trusts might sound like trying to run a restaurant without bowls.

But Li suggests that, as basic as the idea of ILITs might seem to many financial professionals, others need a refresher.

What Is an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust, or ILIT, is a legal arrangement designed to hold a life insurance policy.

If the ILIT itself buys a life insurance policy insuring a client, the death benefit will usually not be part of the client’s federal taxable estate, according to a discussion of the topic posted by Thrivent Financial.

If a client puts a policy in an ILIT at least three years before dying, that will keep the proceeds from the transferred policy out of federal estate tax calculations.