Irrevocable life insurance trusts (ILITs) have become so popular in recent years that estate planning professionals usually turn to these vehicles when faced with the challenge of trying to insulate life insurance proceeds from the insured's taxable estate. However, when examined closely, the ILIT may be a poor choice to accomplish the desired goal. ILITs have many disadvantages: they are inflexible, unable to provide the insured-grantor with control over the policy, expensive to administer, burdensome to manage if Crummey withdrawal powers are required and irrevocable.
Family limited partnerships (FLPs) have gained much attention of late for use in many general estate planning applications, but not as an alternative to the ILIT. The FLP, in most instances, is the estate planner's most effective tool for preventing estate taxation of policy proceeds. It can provide the insured-grantor with all of the benefits that are sacrificed when using ILITs: FLPs are able to provide the insured-grantor with greater control over the policy, are inexpensive to administer, are not complicated by Crummey withdrawal power requirements and are much more flexible than ILITs. An additional benefit exists in the grantor's ability to discount the value of transferred limited partnership interests. Finally, the whole array of problems that arise in managing Sec. 2514 issues caused by lapsing Crummey withdrawal powers is completely avoided.
However, before tax professionals begin advising clients to use FLPs instead of ILITs, they should be satisfied with the disposition of the issues that can be raised by the IRS.
 Will the FLPs, general partner have incidents of ownership in a policy on his life that is owned by the FLP so that the entire proceeds are included in the estate? No. The Service has tried to impute...