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Everything you need to know about irrevocable life insurance trusts

Everything you need to know about irrevocable life insurance trusts

January 23, 2024

You want to protect your estate for the future and secure your assets for your heirs after you are gone. An irrevocable life insurance trust could be a great option for your estate planning needs from both an asset and tax perspective. Let’s learn why you might consider an irrevocable life insurance trust, and how it works.

What is it?

An irrevocable life insurance trust (ILIT) is a trust that owns a life insurance policy on the grantor’s life. This combines the benefits of a trust with life insurance to support beneficiaries after your passing.

How can I create an ILIT?

Setting up an ILIT does require several steps, and can be a bit complicated for those who aren’t very familiar with trusts and other estate planning tools. Here’s how you could create an ILIT:

 

  1. Get a life insurance policy
  2. Appoint a trustee to manage the ILIT
  3. Designate beneficiaries on your policy
  4. Transfer ownership of an existing life insurance policy to the ILIT, making the trust the new policyholder
  5. Make gift contributions to the ILIT so the trust can make premium payments

A few things to note

Once the trust is set up, it can’t be changed. When you eventually pass away, the trustee ensures that your policy is paid out to your beneficiaries. At the same time, because the trust owns the policy, it is shielded from creditors or legal claims to your personal assets.

 

For example, if you set up an ILIT with a $1 million life insurance policy, when you pass away, the trust is paid that $1 million. Then, the trustee distributes the funds according to your designated beneficiaries.

 

Also, if once you’ve set up an ILIT, you should let your beneficiaries know it exists. It’s helpful for your beneficiaries to know about your policy details, trustee information, and any tax implications that may occur from the ILIT in the future.

Benefits

Since an ILIT is irrevocable, any proceeds from the life insurance policy are not taxable upon your death. This can help to reduce estate taxes for your heirs, and potentially leave them with more of your wealth. Other ILIT benefits include:

 

  • Asset protection from creditors
  • Control over wealth distribution
  • Avoiding probate
  • Gift tax exclusion on contributions

Drawbacks

The irrevocable nature of an ILIT means that once assets are transferred to the trust, they cannot be removed from it. This doesn’t give you much flexibility if things change in your future. Other drawbacks include:

 

  • May be complicated to set up
  • Legal and administrative costs
  • Loss of control over your assets once transferred
  • Can be complex for beneficiaries

One of many estate planning tools

An ILIT is one in a long list of estate planning tools that can potentially provide you with tax relief while supporting your future heirs. However, an ILIT isn’t right for everyone, and you may want to speak with a financial and/or tax professional to see if it’s right for you.

 

 

Learn more about how we can support your estate planning, or reach out to us directly to schedule a meeting or ask a question.