In the past, New Jersey estate and trust practitioners regularly used irrevocable life insurance trusts, or “ILITs, ” to shield life insurance proceeds from New Jersey’s estate tax. Generally, with a few exceptions, making an ILIT the owner and beneficiary of a life insurance policy removed the death proceeds of the policy from a client’s estate for estate tax purposes. As a result, it was common practice to include ILITs as part of the estate plan for New Jersey clients that owned their home, had modest savings and a life insurance policy with a death benefit that placed the client above the $675,000 New Jersey estate tax exemption in place from Dec. 31, 2001, to Jan. 1, 2017 (in 2017 the New Jersey estate tax exemption increased to $2 million). In 2018, New Jersey repealed the New Jersey estate tax and the federal estate tax exemption is over $11 million per person today. As a result, many trust and estate attorneys have found less need for ILITs. However, despite the repeal of the New Jersey estate tax and the high federal exemption level, there are still circumstances where practitioners may want to consider the use of ILITs.

Divorce Settlements

Life insurance policies are often utilized in the context of a divorce as a risk management tool in order to protect alimony and/or child support payments in the event of the untimely death of the payor spouse. Since support payments typically stop at the payor spouse’s death, a life insurance policy on the payor’s spouse’s life provides a source of funds to cover the expected support payments if the payor spouse were to pass away prematurely. Although life insurance works well as a security tool for these types of obligations, there are practical issues with keeping the policy in force with the agreed-upon terms and amounts and correctly naming beneficiaries. ILITs provide a great mechanism to account for these practical concerns.