Sep 1, 2006 12:00 PM, By Charles L. Ratner national director of personal insurance counseling, Ernst & Young LLP, Clevelan

By: By Charles L. Ratner national director of personal insurance counseling, Ernst & Young LLP, Clevelan

Over the past few years, our clients' estate and life insurance planning have become far more complicated than they bargained for. Even if clients' personal situations and objectives were relatively static, which is a bold presumption, factors such as uncertain estate taxation, changes to split-dollar rules, and an investment environment that has impacted negatively on both clients' cash flow and the performance of their life insurance policies, have caused stress cracks in the foundations of many plans. For many of these clients, the same irrevocable life insurance trusts (ILITs) that promised so much benefit when they started are now buffeted by tax, economic and personal factors. In certain cases, the ILIT will have to be undone. In others, the ILIT can be left alone, but the insurance must be reassessed. In still other cases, both the ILIT and the insurance will have to be taken back into the shop.

It's logical to think that if an ILIT has become problematic within a plan, the problem is with the ILIT itself, meaning the way it was drafted. But many ILIT issues are not caused by drafting. Though the ILIT could have been technically sound and appropriately designed when it left the attorney's office, years later problems may loom with regard to the gift or generation-skipping transfer (GST) tax of the grantor's premium gifts. Perhaps the Crummey withdrawal powers now unduly limit annual exclusion treatment for large premiums. Or, as we often see these days, an ILIT that no one thought needed to be a grantor trust for income tax purposes now needs to be exactly that, in order to enable the grantor to respond to any number of things in a tax-efficient manner. Maybe it's not taxes. Maybe the ILIT's terms are no longer satisfactory to a grantor who doesn't get along so well with the kids anymore. Or maybe he likes his kids just fine, but thinks they shouldn't be “troubled” with having so much money all at once. Or maybe the grantor's spouse, a primary beneficiary of the ILIT, now realizes that “in trust” means “out of reach” and she demands change.

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