Irrevocable Life Insurance Trusts (ILIT) is a form of life insurance that helps to reduce or eliminate state and federal taxes on an estate after the person has passed away. An irrevocable life insurance trust results in more benefits to the beneficiary than a standard life insurance policy. The policy can be used to cover any owed taxes, debts, or other expenses related to the estate.

An irrevocable life insurance trust is a trust created to both own and control a term or whole life insurance policy while the insured is alive and manages and distributes the proceeds upon death. The grantor creates and funds the ILIT. Transfers made to the trust are permanent, and the grantor succeeds control to the trustee. In turn, the trustee manages the ILIT.

The Benefits Of An Irrevocable Life Insurance Trust

  • Taxes of the estate are minimized
  • Gift taxes are avoided
  • It helps to ensure that government benefits are not affected
  • Helps to protect assets from creditors
  • The distribution of beneficiary payments is easily managed

The benefits of an ILIT outweigh a regular life insurance plan.  The trust is easily accessible for the beneficiary, and they even have the option to take out loans against the trust while the grantor is still alive.  The ability to take a loan against the trust is helpful in numerous circumstances, such as when necessary expenses arise while the grantor is still living.

Bonuses such as the one stated above help ensure that loved ones can cover both personal expenses and final expenses for the grantor. Given that the trust substantially reduces the tax burden, it allows the grantor to choose where their money goes when they die.

Situations That Benefit From An Irrevocable Life Insurance Trust

  • Taxes are owed on the estate
  • An estate needs protection regarding its assets
  • More than one beneficiary is assigned to the inheritance

Many individuals do not want to leave their money to irresponsible family members or loved ones.  An ILIT allows the grantor to place specific stipulations on the money to be given to the beneficiary. The ability to place stipulations on the disbursement of life insurance proceeds gives grantors peace of mind.  Beneficiaries who have issues such as addiction are protected from lump-sum payments that can often do more harm than good.

The main setback regarding an irrevocable life insurance trust is that the trust can not be changed once it has been finalized.  Therefore, it is pertinent for any person who is considering opting for an ILIT to seek the help of a knowledgeable estate planning attorney.  With the help of an experienced advisor, you can rest assured that beneficiary payments will be distributed according to your wishes when you establish the trust.

What To Consider When Choosing An Irrevocable Life Insurance Trust

  • Who is best to assign as a trustee
  • Understand all the rules and regulations
  • You can transfer existing policies, but there is a catch

A spouse may not be the right trustee for an ILIT, and naming them as the trustee limits their ability to use funds from the ILIT. Instead, the surviving spouse is often named as a beneficiary, while a trusted source such as a banking institution, lawyer, or accounting firm is named as the trustee.

Every trust account must be assigned a tax identification number.  Once the tax number has been obtained, it can then be used to purchase life insurance.  Yearly maintenance on an ILIT is another requirement grantors and trustees should be aware of before establishing the trust.

There is the possibility that the trust has to file a gift tax return. However, this is not always the case for every trust. Consult with an experienced estate planning attorney to learn whether the gift tax return is necessary for creating the ILIT.

Life insurance policies can be transferred into an irrevocable life insurance trust, but there are stipulations about this decision.  A clause known as the “look back” clause states that the existing insurance policy is looked at for three years.  If there is no death within the three years, then the insurance policy is successfully transferred over, and the proceeds of the policy is no longer taxable.  However, if the Grantor dies within three years, then the insurance is added to the estate and will be taxed.

When an insurance policy is purchased outside of a trust and transferred into the trust, it must be owned by the ILIT. If this step is overlooked, then the insurance policy is now taxable.  Just remember that it is important to familiarize yourself with all aspects of an irrevocable life insurance trust.

If you would like to learn more about how an ILIT can help you achieve your estate planning goals, contact Sverdlov Law in New York for a consultation.

Katya Sverdlov, CFA, Esq.
Sverdlov Law PLLC
30 Wall Street, 8th Floor, New York, NY 10005
Phone: 212-709-8112
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