Do you have an out of date or "Old ILIT" as part of your estate plan? If so, and if it has unfavorable terms or was poorly drafted, then a recent IRS Revenue Ruling (2007-13) will brighten your day.

Since ILITs by design are irrevocable, there are little options once the ILIT has been signed and funded to get out of the ILIT. This could mean millions of dollars will pass at the death of the Insured/Grantor in a manner that may be disadvantageous for tax purposes or not according to the Grantor’s current intent.

However, at Cox & Nici, we have long been implementing "ILIT rescue planning." Just such an approach has recently been blessed by the IRS!

"ILIT rescue planning" involves the Grantor of the old ILIT establishing a new ILIT with better/different terms, followed by a sale of the insurance policy from the old ILIT to the new ILIT in exchange for cash or other assets, or even in some cases, a promissory note.

Almost all ILITs are by nature “Grantor” trusts for federal income tax purposes. Meaning that the income of the ILIT would be taxable to the Grantor of the ILIT (i.e., the insured senior family member who created the ILIT) even though for distribution purposes it would pass to the beneficiaries of the ILIT and not the Grantor. Since the ILIT usually only holds a non- income producing life insurance policy, there is no income to report.

Typically, a sale of a life insurance policy is a taxable event under §102(a)(2) of the Internal Revenue Code. However, the sale is disregarded when the seller and the buyer are deemed to be the same person for Federal income tax purposes.

Under the ILIT rescue planning technique, the sale occurs between two ILITs whereby the Grantor is the same party. Since the “Seller” and the “Buyer” are deemed to be the same person for Federal income tax purposes, the transaction is disregarded. The policy is sold at its fair market value (i.e., cash value) as of the date of the sale. This amount is usually far lower than the death benefit of the policy. Therefore, the old ILIT will only hold limited amount of funds but the new favorable ILIT will hold the life insurance policy (with the higher death benefit).

If you have an ILIT that you believe may be in need of a "rescue plan" such as this, please contact Cox & Nici for a consultation.