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Life insurance death proceeds paid to a valid ILIT may escape estate taxation in your estate as long as the trust owns the policy and you haven't retained any incidents of ownership in the policy, such as the right to change the beneficiary. Typically, the terms of the ILIT provide that the insurance proceeds be distributed from the trust to your beneficiaries in accordance with your wishes, which are spelled out in the trust document.

Generally, life insurance is purchased within a trust to provide for your family while ensuring that the death benefit is not reduced by estate taxes. Unfortunately, to keep the death benefit from being included in your estate, you cannot require the trustee to use the proceeds to meet estate settlement costs. However, your estate may run into liquidity problems and need to have access to the cash in the ILIT to avoid having to sell assets in the estate.

There are two ways to solve this dilemma. One is to include a provision in the ILIT that permits (but does not direct) the trustee to buy estate assets. The other is to give the trustee permission (but not instructions) to loan the estate some of the proceeds.

If these techniques are used, the estate will have access to the funds it needs to meet its obligations without causing the assets in the ILIT to be included in your taxable estate.

Michael J. Brown, AIF® Senior VP / Branch Manager, Janney Montgomery Scott, 401 New Road, Suite 200, Linwood, NJ 08221, 609-601-2512, michaelbrown@janney.com.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021 Janney Montgomery Scott LLC Financial Advisors are available to discuss all considerations and risks involved with various products and strategies presented. We will be happy to provide a prospectus, when available, and other information upon request. Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Janney Montgomery Scott LLC is a member of the New York Stock Exchange, Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

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