Preserve assets by gifting money to avoid estate tax

February 20. 2012 3:00AM

Preserve assets by gifting money to avoid estate tax

Death taxes seem to come and go, and to adapt to the rises and falls in rates, high-net-worth individuals have found another way to preserve their assets and cash for their heirs.

By forming irrevocable life insurance trusts, commonly known as ILITs, and gifting money — which they will never get back, hence the irrevocable part — to a trust to buy life insurance policies, wealthy people can avoid having their children or grandchildren pay estate taxes on the policy's proceeds that are paid to the trust as beneficiary, which then flows to the heirs tax free.

"They're never going to see the money again, so they need to be happy that this is just a way to increase the amount of money that goes to the children," said Tyler Vernon, CEO of Biltmore Capital Advisors, in Princeton. "For wealthy people, there are just huge benefits of having that pay to an entity outside of their estate where their heirs have no taxes, versus inside their estate, where they can be subject to 50 percent taxes on everything."

For the proceeds to be free of estate or death taxes, the ILIT must be structured properly, with the trust designated the beneficiary and following other intricacies of the law, Vernon said. The insured also can transfer an existing policy, with some restrictions, to an ILIT.

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