Life insurance policies are a well-known measure to create benefits for your loved ones. In exchange for the payments, the insurance company guarantees that your beneficiaries will receive a payment upon your death. Have you ever considered further protecting your life insurance policy by setting up an irrevocable life insurance trust (ilit)? It’s worth taking a look at the benefits of placing your insurance policy in a trust. Read on to find out if an ilit trust is right for you.
what is an irrevocable life insurance trust (ilit)?
An irrevocable life insurance trust, or illit for short, is a trust that holds a life insurance policy as its primary asset. Because it is irrevocable, this type of trust cannot be revoked or changed once it has been created. (Click here to learn more about the difference between irrevocable and revocable trusts.)
Reading: How to terminate an irrevocable life insurance trust
The grantor (the person who sets up the trust) will typically create an ilit during their lifetime. once they purchase a life insurance policy, they will transfer it under the ownership of the trust. After doing so, they can no longer change the term of the trust, nor can they transfer ownership of the life insurance policy back to your name.
how does an irrevocable life insurance trust work?
Three main parties are involved in an ILIT trust: the grantor, the trustee, and the beneficiaries. The grantor is the person who establishes and funds the trust with a life insurance policy. in some cases, they may choose to have a “second to die” life insurance policy. This policy guarantees two lives instead of just one, as in the case of a married couple, and only pays a benefit once both people die.
Once the grantor transfers your life insurance policy to the trust, they are relinquishing control and can no longer make any changes. here, the appointed trustee is responsible for managing the ilit along with the assets he owns. One of your main responsibilities is to ensure that premium payments are made to the policy through the trust account.
When the life insurance policy becomes effective, the trustee must ensure that the benefits are properly distributed to the beneficiaries of the trust. these people are usually direct relatives of the grantor, such as children or grandchildren.
what are the benefits of an irrevocable life insurance trust?
An irrevocable life insurance trust offers several benefits that are hard to ignore. First and foremost, an ILIT offers asset protection. for example, creditors cannot receive death benefits that are protected by a trust.
Many people also use trusts as a strategy to minimize taxes related to estate planning. For example, placing life insurance in an ILIT can help reduce the overall size of the estate, which helps reduce estate taxes. it can also help the estate avoid gift tax consequences.
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Last but not least, an ilit allows a grantor to control how the life insurance benefit is distributed, once activated. , scheduled installments in place. this can also protect the beneficiary from conflicts that could jeopardize government benefits they may already be receiving.
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asset protection
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reduce taxable wealth
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avoid gift tax consequences
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greater control
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protect government benefits
what is the disadvantage of an irrevocable life insurance trust?
There are some disadvantages associated with using an irrevocable life insurance trust. it is always important to take a close look at the pros and cons before committing. this is especially true in the case of an illit, because they are irrevocable in nature. once you set up and fund your ilit, you can no longer make any changes. This means that you cannot change your beneficiary or beneficiaries, even if you experience a divorce in the family or a fight. If you’re unsure about the future or prefer to remain flexible, it may be best not to add an irrevocable trust to your estate plan.
why use an ilit?
You can choose to use an ILIT instead of other types of trusts if you are concerned about the size of your taxable estate and want more control over how your life insurance policy is distributed.
By placing your life insurance policy under the ownership of an irrevocable trust, you are reducing the size of your taxable estate. This is because assets placed in trusts are not treated as individual taxable assets. therefore, if you are close to the estate tax threshold, you may want to consider moving your life insurance benefit into a separate irrevocable life insurance trust.
Furthermore, any type of trust offers grantors a great deal of control over the management and distribution of assets. If for any reason you do not want your beneficiaries to receive a lump sum payment from your life insurance, you can include instructions to the trustee on how you would like the benefits to be distributed. For example, you can designate that life insurance benefits are paid to your beneficiaries in small installments, or once they reach a certain age.
common questions about irrevocable life insurance trusts
Because irrevocable life insurance trusts are so unique in nature, you’re bound to have some additional questions. We went ahead and answered some of the most popular questions about ilit trusts below.
who owns an irrevocable life insurance trust?
Technically speaking, the owner of an irrevocable life insurance trust is the trust itself. Once the grantor creates and funds a trust, the trust becomes the owner of the assets inside. The trustee is responsible for managing and distributing the assets of the trust.
who can serve as trustee of ilit?
virtually anyone can act as ilit trustee, as long as they are not the person insured by the life insurance policy. Since the trustee will be responsible for making premium payments, administering the policy, and making distributions to beneficiaries, it is extremely important to appoint someone you trust. if you don’t have a personal contact in mind, know that you can also appoint a professional service or an independent trustee.
can an irrevocable life insurance trust be terminated?
Generally, an irrevocable trust cannot be terminated by design. however, it is possible to obtain a court order to cancel the trust in certain circumstances. for example, the court may approve a termination if the ilit no longer serves its original purpose due to changes in the family.
To avoid having to appoint an attorney and going through costly legal proceedings, it is best to be very careful when setting up the trust. this is because irrevocable trusts can be difficult to reverse.
set up your ilit today
An irrevocable life insurance trust is an excellent option if you’re looking for better asset protection and more control over what happens to your life insurance benefits. By transferring ownership of your life insurance to an irrevocable trust, you’re not only reducing the size of your taxable estate, you’re also protecting that asset from creditors. You also have the option to control how much and when your payees will receive their payments. This is especially helpful if any of your beneficiaries are receiving government benefits and you can’t risk putting them in harm’s way.
If you think an ilit is the right estate planning tool for you, there’s no need to wait to get started! in confidence & Will we offer estate planning products designed to benefit each unique situation? this includes a wide range of trust planning options, and we’re here to help you every step of the way.
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