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Effects of tax law changes on irrevocable life insurance trusts

In the past, Nevada residents with substantial estates who expected their heirs to owe federal estate taxes often planned for the expenses by creating irrevocable life insurance trusts. These trusts paid for life insurance policies funded with small gifts to pay the premiums every year. When the time came, the life insurance would cover tax bills.

The passage of the Tax Cuts and Job Act of 2017, however, significantly raised estate tax exemptions. An individual in 2018 could avoid these taxes on an amount up to $11.2 million. As a result of the tax reform, only about 1,800 estates every year will owe federal estate taxes. This has left many life insurance trusts obsolete.

The elimination of the original goal of these trusts leaves grantors and trustees with decisions to make about their existing life insurance policies. Trustees must work within the terms of the irrevocable trusts. For example, they could extend the policies for their current face amounts. This might work if the insured person passes on before the death benefit expires. Alternatively, a policy might be continued but at a reduced face amount. Regardless of when the insured dies, a small death benefit would remain.

Depending on the terms of the trust and the resources of the beneficiaries, one might lend the trust money to continue premium payments. This could preserve the value of the policy. Other options include surrendering the policy or pursuing a life settlement.

Changes to tax law or marriages, deaths, births and divorces often trigger the need to review an estate plan. A person with questions about trust planning could consult an attorney. By researching federal and local laws, the lawyer could develop strategies to meet the client's goals, such as caring for a person with special needs or funding an education.

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