LILP vs. ILIT: What's the best entity structure to hold your premium financed life insurance policy?
Minimize your estate taxes and maximize your life insurance benefit with a trust or partnership that fits your needs
When purchasing a premium financed life insurance policy, it’s important to consider both the needs of your loved ones after your death and your own needs throughout your life.
Most people who use premium financing choose to set up an Irrevocable Life Insurance Trust to purchase and own their policy. And while this is a valuable tool with several important advantages, it is not the only entity structure for holding life insurance. Life Insurance Limited Partnerships, though less well known, are another effective strategy.
ILITs and LILPs each have their own pros and cons, so it’s important to consider your specific situation and consult with an expert who’s familiar with both options.
Differences Between an LILP and an ILIT
LILPs and ILITs are both set up during a person’s lifetime in order to purchase and own permanent life insurance.
The main difference between the two is the level of control the insured person retains. In an LILP, the insured person — and in some cases the person’s spouse — is a general partner, either directly or through an LLC. The insured person’s heirs are limited partners, either directly or through an irrevocable trust.
In an ILIT, the insured person relinquishes control over the policies and trust assets. They are not a trustee of the ILIT and cannot change, alter or amend the trust without incurring costs or estate tax exposure. Upon the insured person’s death, policy benefits are paid directly to the ILIT, and the ILIT will then purchase assets from the insured’s estate, or make loans to the estate.
Benefits of Establishing an ILIT
If structured correctly, an ILIT can dramatically reduce the size of an insured person’s estate, which in turn reduces the amount of taxes owed upon that person’s death. Because the insured person is not a trustee, and because the trust is irrevocable, the insured does not legally have ownership over the policy, so it is not factored into their estate.
If a person has no interest in accessing the cash value of their policy, and they’re confident that they won’t need to change beneficiaries in the future, this structure can serve them well.
Because ILITs are so common, there’s also plenty of case law to support their validity, and more attorneys have experience establishing them.
Benefits of Creating a LILP
Though LILPs are less common, they provide similar benefits to an ILIT but without the same rigidity.
In a Private Letter Ruling in 2009, the IRS determined that a taxpayer who served as the general partner of an LILP did not have ownership of the policy inside that LILP, so this entity structure functions similarly to an ILIT in terms of estate tax benefits upon the insured person’s death.
Since the insured person serves as a general partner, however, they have increased management control over the LILP, along with access to cash value that builds in the policy during their lifetime. They also have the ability to make certain changes to the partnership agreement when the need arises.
The only real disadvantage of an LILP is that many practitioners are unfamiliar with it, but in reality it is neither a new nor novel strategy. If you’re interested in the benefits of an ILIT but are nervous about the lack of flexibility, an LILP may serve as an ideal alternative.
How to Choose an Entity Structure
The decision between different entity structures is extremely case specific, so it’s important to talk to an experienced attorney who is familiar with both LILPs and ILITs.
If a practitioner dismisses the idea of LILPs from the start, or seems to have the solution before they’ve even heard the problem, that person will likely not provide advice that’s tailored to your needs.
At Goheen Companies, we’ve cultivated strategic and enduring relationships with estate planning and tax attorneys who are qualified to set up both ILITs and LILPs, and who will spend the time necessary to understand your unique situation and make a recommendation accordingly.
These attorneys are well-credentialed, published in the field of estate and tax planning, experienced in working with high net-worth families, and provide bespoke planning for each client. We stay in communication with the attorneys throughout the process to ensure a shared understanding among all parties.
If you’re interested in learning more, please contact us to set up a consultation.