Irrevocable Life Insurance Trusts

An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust used to protect your assets from probate.  Like the name suggests, ILIT’s are a way to remove life insurance policies from your estate, enabling you to bypass those pesky estate taxes.  Here is the breakdown:

• You are the grantor of the trust, meaning you fund the trust with your life insurance policy/policies.
• You designate a trustee.  Their job is to pay the bills and execute all of your trust-related decisions and needs.
• When forming the trust, you will designate one or more persons to be beneficiaries of the trust.  Upon your death, these people will receive the remaining funds of the trust.

One of the most common objections when dealing with estates are the tax implications, especially estates valued over $12.06 million (resulting in a 40% estate tax).  While the majority of people do not come close to this amount, many states begin taxing estates valued at $1 million.  This can be of particular interest because estate means are often tied up in real property or other assets, making liquid funds hard to come by.  With an ILIT, your trustee can purchase your estate’s assets with your life insurance proceeds, making available the necessary funds to pay taxes and other fees.

In addition to tax benefits, ILIT’s allow you to have more control over how your life insurance proceeds are used.  Without an ILIT, the beneficiaries of your life insurance policy would inherit the money, leaving them to spend it however they see fit.  With an ILIT, you get to decide how and when your beneficiaries can spend your life insurance proceeds.

Just like any other irrevocable trust, it is important to remember that the nature of irrevocable trusts are just that: to not be revoked.  This is imperative when considering whom you designate as beneficiaries of your trust; even a change in life circumstances, such as divorce or remarriage, prove to be more challenging to modify the trust.  Another facet to make note of is that an ILIT transfers the ownership of your life insurance policy from you to the trust.  Because you are no longer the owner of the policy, you cannot make changes to your policy after ownership lies in the trust.  Because of the nature of this type of trust, it is important to consider all outcomes before deeming the trust complete.  

To discuss the finer points of an ILIT and other estate planning options, schedule a consultation with one of our attorneys by calling 251-621-1555.