Irrevocable Life Insurance Trusts

An Irrevocable Life Insurance Trust (ILIT) is a specialized legal arrangement designed to hold and manage life insurance policies outside the insured individual's taxable estate. By placing life insurance policies within an ILIT, the proceeds can be kept separate from the insured's estate, potentially reducing estate taxes upon the insured's death.

Here's how an Irrevocable Life Insurance Trust typically works:

1. Creation: The insured individual (grantor) establishes the ILIT and transfers ownership of one or more life insurance policies into the trust. Once transferred, the policies are owned by the trust, not the insured, and are no longer considered part of the insured's estate for estate tax purposes.
2. Trust Terms: The grantor specifies the terms of the ILIT in a trust document, including the identity of the beneficiaries, the distribution of proceeds, and any other instructions or conditions governing the trust.
3. Trustee Selection: The grantor appoints a trustee to manage the ILIT and administer the life insurance policies in accordance with the trust document. The trustee has a fiduciary duty to act in the best interests of the trust beneficiaries and must adhere to the terms of the trust.
4. Premium Payments: The ILIT is funded through annual gifts from the grantor or other contributors, which are used to pay the premiums on the life insurance policies held by the trust. These gifts are typically made up to the annual gift tax exclusion amount to avoid triggering gift tax liability.
5. Tax Benefits: Because the life insurance policies are owned by the ILIT and not the insured individual, the death benefit proceeds are not included in the insured's estate for estate tax purposes. This can result in significant estate tax savings, particularly for individuals with large estates.
6. Asset Protection: Assets held in an ILIT are generally protected from creditors' claims, providing an additional layer of asset protection for the trust beneficiaries.
7. Distribution of Proceeds: Upon the insured's death, the life insurance proceeds are paid to the ILIT. The trustee then distributes the proceeds to the trust beneficiaries according to the terms of the trust document, providing financial support or security as intended by the grantor.

Key Benefits of ILITs:

1. Estate Tax Efficiency: Life insurance proceeds held in an ILIT are typically not included in the insured's estate for tax purposes, potentially reducing the overall estate tax liability.
2. Control and Management: The trust document allows the grantor (the person creating the trust) to specify how the life insurance proceeds should be managed and distributed, ensuring they benefit intended beneficiaries according to specific terms.
3. Creditor Protection: Depending on applicable state laws, assets held within an ILIT may be protected from creditors of the insured and the beneficiaries.
4. Privacy: ILITs can provide a level of privacy because the life insurance proceeds and the terms of distribution are managed within the trust and are not subject to public probate proceedings.

Creating an ILIT:

Setting up an ILIT involves several important steps, including drafting a trust agreement, transferring ownership of the life insurance policy to the trust, and appointing a trustee responsible for managing the trust according to its terms. In addition, to obtain estate tax protection, specially drafted letters must be sent to each beneficiary annually. Due to the complexities involved, consulting with an experienced estate planning attorney is crucial to ensure the ILIT is properly structured and executed in compliance with relevant laws.

Contact Will and Trust Planning Today

For personalized advice on estate planning, including strategies to minimize or avoid probate, contact Will and Trust Planning today. Our experienced estate planning attorneys can help you understand your options, draft essential documents, and create a plan that protects your assets and achieves your goals.