the BERINGER group Newsletter

Jeffrey Craig


Irrevocable Life Insurance Trusts in a new tax landscape: questions and difficult decisions

by Jeffrey Craig

    Trustees, Advisors and Insurance Professionals beware!  Clients are wondering; what should I do with my ILIT life insurance policy, and how irrevocable is an irrevocable trust that I don't need anymore?

The American Taxpayer Relief Act of 2012 was passed by Congress and signed by the President in January of 2013.  For the first time in more than a decade certainty has been achieved in estate planning matters such as the Death Exclusion, Lifetime Gifting and Estate Tax rates. 

In the wake of this recent development, the insurance policy planning that has occurred for the last 20 years now leaves clients and trustees with some new questions and difficult decisions.  It is interesting to view this same issue from three different perspectives:

    The Client:  "I don't need this policy anymore and better yet I won't have to pay for it either.  I wonder if I have access to irrevocable assets."

    The Insurance Agent:  "Ugh oh, I have made a career out of selling these policies, many rigid in their premium structure with the need for ongoing or lifetime premiums.  What should I tell my clients?"

    The Trustee (Non-Corporate):   "I really didn't understand what I signed up for years ago and now I don't know what to do or where to begin to provide guidance for this valuable asset to the Grantor and their beneficiaries."


All three responses are reasonable but consideration needs to be given to the real issue:  The Trusts are irrevocable and past premiums have been made as gifts with no access to the values. 

The Grantor's control of the situation is basically to make gifts, which may or may not include continually funding of premium payments.  The terms of the trusts typically allow proceeds to pay taxes due and then provide access to funds for beneficiaries for HEMS  (Health, Education, Medical and Support) typically for multiple generations.

The structure of the policies in combination with the trust language often leaves all parties to the transaction confused and wanting for a simple linear solution. 


When considering what to do with policies for estates valuedless than $5MM, $10MM for married couples, does a simple solution exist?  It depends who you seek council from regarding these questions.  The attorney will drive recommendations by the language in the trust, and rightly so.

Unfortunately, this may not include knowledge or creativity when deciding what to do with the existing trust owned policy(s).  Attorneys will often recommend a fee based TOLI (Trust Owned Life Insurance) analysis.  

The client will most likely lean toward options that seek to eliminate ongoing premiums.  This can be accomplished by a review of the policy, the terms of the trust and also a review of their total estate and tax analysis to include estate, income, state and all possible or probable transfer taxes. 

This would outwardly appear to be the best course of action unless the policy has a rigid premium structure, or in the case that a guaranteed product was sold that has both surrender and reserve values that differ and are not outwardly apparent.

Unless a comprehensive approach is taken that considers the legal, tax, financial and insurance policy components, short term financial and legal benefits as well as the long term generational tax benefits may be compromised. 

All decisions can be deemed reasonable if filtered through a simple rule, "Does it make good financial sense?"   When the decision to purchase insurance for estate tax reasons was made, it was completed through a careful analysis of cost and benefit, internal rates of return, net present value and how it compared to alternative investment strategies.  So if it made sense then, it probably still makes sense today.


This analysis should be conducted by a consultant adept at all needed disciplines - Law, Insurance, Finance and Tax. The options for an existing insurance policy owned by an ILIT are the same as they always have been:

  • Maintain current policy and continue to fund as recommended at inception or from latest in-force analysis.
  • Consider reduced face amounts and cease premium payments.
  • Surrender policy for net cash value (this may have adverse income tax consequences if cash values are greater than cumulative premiums.  Determination of basis is difficult in the case with whole life contracts as the various dividend options aren't always apparent).
  • Exchange policy for like values from estate and use for alternative purposes such as charity or key person - especially if health has changed.
  • Update insurance contract with products issued today which have more favorable pricing and features.

A comprehensive approach to determine what to do with your life insurance policy should include the following:

  • A preliminary insurability review of health.  If health has changed and mortality reduced, the death benefit has an increased chance of paying off sooner than when originally issued.  Additionally the insured may not be able to obtain new insurance at competitive rates, which enhances the value of the existing policy.
  • An estate analysis to determine amounts and needs, if any.  Additional costs at death might include: state death taxes, IRD (Income in respect of a decedent), future tax law changes, etc.
  • A document review of the ILIT language to understand the options available for the trust assets
  • A policy review to determine the inherent values and options available.  There are many unknown components that exist in a policy which may differ from the declared cash  and surrender values.

The existing planning and ILIT insurance benefits are and continue to be very valuable assets for the clients and their beneficiaries even in light of the changing tax law landscape.  Those who control the destiny of these assets include the Grantor and (if they continue to fund the initial program) the Trustee.  Advisors have fiduciary responsibilities to act in a prudent and 'dispute defensible' manner on behalf of the Beneficiaries and the Benefactors of the planning, who hopefully agree on the path of decisions made on their behalf.

More than likely, these decisions will be made in calendar year 2014 as the discussion will spawn from premium notices that are typically sent to the Trustees two or three weeks prior to the policy anniversary and premium due date.  This isn't sufficient time to determine prudent paths and options.  It is recommended that the premiums be paid on schedule this year and that the consultative analysis be conducted soon thereafter as all components ofa comprehensive study can take 60-90 days.

In summary, consider the original intent of the planning, the financial decision to purchase the insurance, the tax free nature of the death benefit and the same metrics that made it a decision worth acting on initially and all the possible outcomes that are produced from a comprehensive analysis

When the insurance is viewed as a financial asset that can benefit future generations and not as a cost item, then all parties can usually agree on the best course of action. There is little doubt that the result of the analysis will yield significant future benefits for generations.  Research and consultants are available to assist your efforts.  Its never a bad idea to consider options presented by more than a single source for best results .

Jeffrey W. Craig, CLU, ChFC, AEP, Senior Vice President of Wealth Transfer at Mercury Financial, is a specialist in the design and implementation of advanced planning strategies for families of significant wealth, entrepreneurs and professionals. For most of these clients, this involves working with their advisors to establish, fund and leverage tax-efficient, multi-generational wealth strategies, frequently in tandem with philanthropic techniques.  He can be reached at:





Copyright 2013.  The BERINGER Group