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

The goal of this discussion is to examine some of the myths and realities of estate planning. A quantity of articles have recently been written on the subject matter but let’s see if we can’t put a different spin on it keeping it simple. Simply by dispelling some of the common misconceptions, we will have an improved knowledge of how important it is to take positive action to keep our estate strategies in order.

The Monetary Growth and Tax Getting back together Relief Act of 2001 (EGTRRA) threw many people for a loop in respect to estate planning. Taxes laws are never simple but EGTRRA added a level of confusion hardly ever seen in advanced planning. For instance, between now and 2011 the federal government estate tax is planned to diminish, disappear and then spring back to life. According to a Wall Street Journal article dated May 11, 2004, the “… current house tax law puts estate-tax planners within an impossible situation… “. With such uncertainty, some potentially detrimental estate planning myths have surfaced. These financial “urban legends” stand in the pattern of prudent house planning. 

Myth. Because of tax law uncertainty, you should avoid using insurance coverage trusts.

The irrevocable a life insurance policy trust (ILIT) is probably the most critical insurance related estate planning tool available to you. The inapelable nature of the trust provides estate tax personal savings while the insurance provides an economical way to pay estate taxes (depending on age and health). The benefit of an inapelable life insurance trust is that the death takings of the policy are not contained in the insured’s real estate. If kept out of the decedent’s estate, the death proceeds will not raise the estate tax burden. The irrevocable life insurance trust is a dual winner because, not only are the death takings outside the insured’s property, but the proceeds can be accessible to meet house liquidity needs.

To make sure that the life insurance proceeds will be omitted from the insured’s property, two of the main requirements that must be fulfilled are that the covered with insurance should not have any occurrences of ownership in the policy and the trust must be irrevocable. A few people believe, in the face of tax regulation uncertainty, clients should avoid using ILITs. These same people fear that each policy is located within an ILIT, the insurance plan is locked in the trust forever, even in the unlikely event that the estate tax is repealed.

Nothing could be farther from the fact. In reality, ILITs can be drafted with overall flexibility. Some ILITs today are being drafted to give the trustee the foresight to distribute the cash surrender value of the insurance policy to trust beneficiaries during the trust creator’s lifetime. This “escape” language builds overall flexibility into ILITs.

Myth. Estate taxes reform, or repeal, would signal the end of charitable giving.

Giving to charity is emotionally worthwhile. The IRS also offers you tax breaks for charitable donations. You may utilize charitable giving strategies as a technique to minimize or freeze the value of your estate. Several people have bemoaned the likelihood of estate taxes repeal or reform, professing that it will significantly reduce charitable giving. The argument posed is that if fewer estates are subjected to the property tax, then fewer people will be inclined to make charitable gifts as an estate tax decrease strategy.

The numbers inform a different story. Seeing that 2001, the estate taxes exemption amount (the amount of property each person can pass free from federal estate taxes) has more than doubled. Based on the myth, the increasing property tax exemption amount means that fewer people will be inclined to give to charity. The actuality is that during the same time period, altruistic giving nationwide rose by practically $90 billion! If perhaps the myth was right, how could this be?

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