For many years, taxpayers with moderate to large estates relied on various estate planning tools to try and avoid incurring a hefty estate tax liability when they died. Clearly, the more money that goes to paying estate taxes the less money will be available to pass on to loved ones. One tool that has historically been very popular to accomplish this goal is the irrevocable life insurance trust, or ILIT. In light of relevant provisions in the recently passed American Taxpayer Relief Act of 2013, many taxpayers are wondering whether an ILIT is still needed.

The benefit to an ILIT is that a taxpayer can create the trust, purchase a life insurance policy and then transfer it into the trust. Because an ILIT is an irrevocable trust, assets transferred into the trust are not considered to be owned by the taxpayer at the time of death and are, therefore, not taxable. The proceeds can then be distributed to the beneficiaries of the trust, effectively transferring a large amount of money without incurring estate taxes. Now, however, the lifetime exclusion limit for gift and estate taxes has been permanently increased to over $5 million, leaving some to wonder if an ILIT remains a good estate planning option.

Because an ILIT is an irrevocable trust, modifying it can only be accomplished through court, it at all. This may leave canceling the policy and terminating the trust as the only viable option if you decide that your ILIT is no longer needed. Before doing that though, consult with your estate planning attorney because many of the other benefits to an ILIT remain unchanged.