Save on Estate Taxes with the Irrevocable Life Insurance Trust

The irrevocable life insurance trust (or “ILIT”), as its name suggests, is irrevocable. It cannot be rescinded, amended, or modified in any way by the “grantor” after its creation. Once the grantor contributes property or a life insurance policy to the trust, he or she cannot get it back. However, the grantor can retain the power to change the trustees and the grantor’s spouse and others can be given power to change beneficiaries.

An ILIT can be recommended for many purposes, but it is primarily thought of as a shelter from estate taxes. Multiple policies can be owned by one ILIT, but spouses must each have their own trust, and a “second-to-die” policy (that pays after both spouses have died) must have its own ILIT.

There are at least four good reasons to consider utilizing an ILIT in your estate plan:

(1) State and federal estate taxFederal Estate Tax: The federal estate is part of a unified federal gift and estate tax that is an excise on the transfer of wealth. Read More elimination or reduction

If an ILIT is properly structured, the death benefits paid to the trust will be free from inclusion in the gross estate of the insured. The key is trust ownership of the policy. During life, the insurance policy itself and premiums to pay for it are gifted to the trust, which causes the proceeds at death to be excluded from the taxable estate of the insured. When the decedent owns his or her own policy, the proceeds are included in the taxable estate of the decedent. With state and federal estate taxFederal Estate Tax: The federal estate is part of a unified federal gift and estate tax that is an excise on the transfer of wealth. Read More rates currently ranging from 10% to 40%, the ILIT can be a huge benefit.

(2) Liquidity in your estate

Even well planned estates may incur estate taxes or other settlement costs for which liquidity is valuable. The beneficiaries of the estate can tap money in the ILIT to pay their obligations in the estate.

(3) Protection of funds for minor heirs

If the insured has beneficiaries (or potential beneficiaries) who are minors, or adults with possible issues in the way of debt, divorce, disability, destructive habits, or are close to death (the “5Ds”), the ILIT will shelter the proceeds, with discretion in the trustee for distributions, including for health, education, maintenance, and support.

(4) Protection of cash values and death benefits for yourself and for heirs

The ILIT will also provide a level of asset protectionThis general term refers, logically, to protecting assets from claims against trust beneficiaries. Read More for you – the insured – because cash values can be protected from your own current creditors in the ILIT. ILITs are not considered to be owned by the insured or the beneficiaries, which in turn makes the assets of the trust – be it the policy itself, the cash value, or the future cash proceeds – extremely difficult for creditors to reach.

The mechanics of creating, funding, and working with an ILIT are mentioned in an article provided by John Hancock Life Insurance, Basics of Irrevocable Life Insurance TrustsA trust that cannot be revoked by the Grantor. Irrevocable trusts are created to either save taxes or protect assets, or both. Read More. The details of compliance necessary for an ILIT are easily managed with professional guidance. We offer an ILIT maintenance service as an ongoing support option to give you the peace of mind that everything is being handled as it should.

What would you like to protect? Let us give you an idea or two in a complimentary 15-minute phone consult on the use of irrevocable trustsA trust that cannot be revoked by the Grantor. Irrevocable trusts are created to either save taxes or protect assets, or both. More.