Irrevocable Life Insurance Trusts Can Accomplish Many Estate Planning Goals

April 14, 2020
Brad Galbraith, Esq.

Millions of Americans purchase life insurance as a way of providing for their loved ones after they pass away. Leaving life insurance death benefits directly to family members or other designated beneficiaries can involve certain risks. Estate taxes, exposure to creditors, and supplying financially immature individuals with lump sums of cash, are just a few. An Irrevocable Life Insurance Trust, however, may be a solution.

An Irrevocable Life Insurance Trust (ILIT) is a type of living trust that owns the life insurance policy and serves as the beneficiary to the requisite death benefits; your desired heirs would be the beneficiaries of the trust. Since you never actually own the insurance policy or the policy proceeds, they are not technically part of your estate. This means the insurance proceeds are not subject to federal or state estate taxes, which depending on the value of the estate and where you live, can reach as high as 45 percent.

If properly created, an ILIT also can be used to reduce the value of your taxable estate by placing other permissible assets in the trust and by taking advantage of the “gift tax exclusion.” You can give away up to a specific amount of money each year to an adult child, grandchild or anyone you want without paying a stiff gift tax. Further, married couples can make a combined gift, which doubles the annual amount.  An ILIT avoids gift tax consequences because contributions made by the life insurance grantor are considered gifts to the beneficiaries.

An ILIT can further protect minors who may not be able to handle large inheritance assets, as well as special needs heirs and irresponsible adults. This is accomplished by maintaining control of the policy benefits. A handpicked trustee would oversee the trust and the distribution of trust funds in accordance with the grantor’s predetermined wishes. Keep in mind, however, that ILITs are irrevocable. Once created, they cannot be rescinded, amended or modified, and polices and property held in trust cannot be reclaimed by the grantor.

There is so much more to these unique estate planning vehicles and to expertly crafting an Irrevocable Life Insurance Trust to fit your needs is of the utmost importance. If you or someone you know would like more information, do not wait to contact one of the experienced estate planning attorneys in our firm today, or at any point in the future.

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