What is an Irrevocable Life Insurance Trust?
Similar to other trusts, an irrevocable life insurance trust allows the grantor typically sets up and funds the ILIT, and gifts and transfers made to it are permanent, with the grantor relinquishing control to the trustee. While the trustee manages the fund, the grantor sets the rules by which the trust should pay distributions to their heirs. However, unlike other trusts, which may include stocks, bonds, and real estate, an ILIT is designed to own and control life insurance policies. These trusts can own both individual and “second to die” life insurance policies, which insure two lives and pay out only when the second person dies.
In order to avoid “incidents of ownership”, it is important that the grantor is not named as the owner of the life insurance policies within an ILIT. The reason for this is that the IRS can look back three years upon the death of the grantor and still include the proceeds of the life insurance in the value of their estate, making it vulnerable to estate taxes. However, if the policies are issued to the trust, beneficiaries will still receive the proceeds as designated by the trust but, for tax purposes, the value of the proceeds will not be counted as part your estate. Ideally, an estate attorney will draft the trust in such a way as to ensure the policies included in it are properly obtained, invulnerable to gift taxes, and issued to the trust rather than the grantor.
When does it make sense to have an Irrevocable life insurance trust?
When the proceeds of a life insurance policies will be significant, your estate could become vulnerable to estate taxes. While the federal estate tax threshold is rather high, some states have much lower thresholds, causing many estates fall into the taxable range.
Because the ILIT is normally designated as the primary beneficiary of the policies within the trust, the proceeds of the death benefit will become part of the trust for the benefit of the people who are named in the trust documents. Subsequently, a surviving spouse could receive payments from the trust at regular intervals instead of a lump sum, thereby avoiding eventual estate taxes if he or she were to die before the money is depleted.
The Bottom Line
An irrevocable life insurance trust is a powerful tool that is worth considering for any wealth management plan. It allows the grantor much greater flexibility in managing life insurance policies to the greatest advantage of their family and descendants. Our team of asset protection attorneys at Dilendorf Law Firm will help you determine the best way to you to benefit from this trust.