Filing Gift Tax Returns for Gifts to ILIT's

10/10/2011

I often get asked whether it is necessary to file a gift tax return for contributions made to an irrevocable life insurance trust ("ILIT").  In my opinion, filing a gift tax return for an ILIT, even if not technically required because all gifts are below the annual exclusion, is a good idea for two main reasons.

First, it starts the running of the statute of limitations for an audit of the gift.

Second, it allows you to decide affirmatively whether GST exemption is allocated. The GST Annual Exclusion does not apply to a gift in trust, unless certain criteria are met. If the GST Annual Exclusion does not apply, a portion of a person's GST exemption must be allocated. Some trusts may qualify for an automatic allocation of a person's GST exemption, however, I still perfer filing a gift tax return because it allows the donor to track his or her GST Exemption (i.e., the amount used and the amount remaining).