An irrevocable life insurance trust (ILIT) is created to own and control a permanent or term life insurance policy while you are alive, as well as to manage and distribute the proceeds that are paid out upon your death. It is a good way to financially prepare your family for life following your death. It is a good way to support your loved ones and to protect the property that you have collected over time.
The first thing to remember about an ILIT is that it cannot be revoked. That means that the terms of the trust will not be able to be modified once you set it up. When you die, the death benefit that you choose for your life insurance will move into the trust. Then, it will be passed on to the selected beneficiaries. You don’t have the option to change beneficiaries after you or your spouse passes.
Can you be the trustee of your ILIT?
In order to make the tax benefits work the way you would intend, the owner/grantor of the trust should avoid any ownership in the life insurance policy and the premium must be paid from a checking account owned by the ILIT. If you transfer an existing life insurance policy to your ILIT, there is a three-year lookback period in which the death benefit could be considered part of the grantor’s estate.
How will your insurance be distributed to your beneficiaries?
That depends on the terms of your trust. You can decide on how the benefit is given out. You can ask for it to be invested into the stock market or to be used as a payment for family expenses or property taxes. You can select from survivorship, term life or whole life plans, which will also influence the way the plan is handled. An ILIT can own individual and “second to die” life insurance policies. Second to die policies insure two lives and pay a death benefit only upon the second death.
Why have an irrevocable life insurance trust?
One of the reasons is because it allows you to have control over your money even after you’ve passed away. Any outstanding taxes or debts in your name won’t come out of this money, because the trust is not in your name. Other reasons include:
- Minimizing Estate Taxes
- Avoiding Gift Taxes
- Protect Government Benefits – involving those who receive government aid such as social security disability income or Medicaid.
- Asset Protection – coverage should be protected from creditors
- Discretionary Powers to Make Distributions
- Legacy Planning
Tax Considerations – ILIT trusts have their own tax ID. The cash value accumulating in a life insurance policy is free from taxation as is the death benefit.
If you want to learn more about Irrevocable Life Insurance Trusts, contact Charles Rick at the Pottstown Estate Planning Law Firm of Rick Stock Law. To schedule a free consultation to review your estate and see how we can help you plan, click here.