IRREVOCABLE LIFE INSURANCE TRUSTS (ILITs)
AN ADVANCED ESTATE PLANNING TOOL
What is an Irrevocable Life Insurance Trust?
An irrevocable life insurance trust (ILIT) is a legal arrangement that seeks to minimize your current tax burden as well as the impact taxes will have on your estate. It accomplishes this by transferring assets from one party (you) to another (the trust) and uses a life insurance policy to efficiently distribute the proceeds when you pass away.
How do ILITs work?
ILITs are trust structures set up between three legal parties:
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The grantor – the person who creates and funds the trust.
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The trustee – the individual or organization that manages the trust and assumes responsibility for paying annual insurance premiums and overseeing trust administration. (The trustee can be a friend, a relative, or an independent professional.)
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The beneficiary(ies) – the individual(s) who will receive the trust assets upon the grantor’s death.
1st - You will create an ILIT.
2nd - You will remove taxable assets from your estate and transfer them to the trust.
3rd - The trustee then uses these assets to purchase a life insurance policy in your name and will continue to pay the premiums so the policy remains in force.
When you die, the policy’s death benefit is paid directly to the trust, which will, in turn, distribute the proceeds to any beneficiaries you have named.
Benefits of ILITs:
If you are an affluent family with a sizable estate or have a loved one with special needs who will require ongoing care, an irrevocable life insurance trust offers a variety of benefits:
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By removing taxable assets from your current portfolio, an ILIT may help lower your current tax burden.
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Although each state has its own rules regarding exactly how much of the insurance policy cash value or death benefit can be protected from creditors, when the policy is held in an ILIT, any excess value above those limits is generally protected from the creditors of both the grantor and the beneficiary. This can be especially beneficial if you or your beneficiaries are in highly litigious professions.
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For those seeking to provide lifetime care for a family member with special needs, careful estate planning is essential. Using an ILIT can help ensure that inherited assets don’t inadvertently interfere with a beneficiary’s eligibility for government benefits such as Social Security Disability Income or Medicaid. By carefully controlling how distributions from the trust are used, the trustee can ensure that continued benefit eligibility is maintained.
Other Advantages:
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The ILIT may provide liquidity to pay estate taxes and expenses;
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The ILIT may provide protect life insurance proceeds for future generations;
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The ILIT may provide provide professional management of trust assets;
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The ILIT may provide avoid probate with respect to the insurance proceeds;
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The ILIT may provide help protect beneficiaries from poor financial decisions; and
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The ILIT may provide coordinate with your overall estate and business succession plan.
Downside of ILITs:
The only major downside is that ILITs are irrevocable. A revocable trust can be easily modified or terminated because the assets remain your property, but you relinquish control over assets when you gift them to an irrevocable trust. Therefore, the trust cannot be modified without legal action or the consent of the beneficiaries.
Crummey Powers:
Many ILITs include what are commonly known as Crummey withdrawal powers. These provisions temporarily give beneficiaries the right to withdraw gifts made to the trust.
Although beneficiaries rarely exercise these rights, they allow the gifts used to pay insurance premiums to qualify for the federal annual gift tax exclusion, making the trust significantly more tax efficient.
Because Crummey powers involve highly technical tax rules, they should be carefully drafted and administered.
Existing Policies vs. New Policies:
An ILIT may either:
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purchase a new life insurance policy; or
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receive ownership of an existing policy.
However, transferring an existing policy into an ILIT requires careful planning because of the federal three-year inclusion rule. Generally speaking, if the insured dies within three years after transferring ownership of an existing policy to the ILIT, the death benefit may still be included in the insured's taxable estate.
For this reason, many ILITs are funded with newly issued policies whenever practical.
Administrative Requirements
Administrative Requirements:
The trustee must:
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properly administer the trust,
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maintain records,
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provide required notices, and
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comply with applicable tax rules.
Gift Tax Considerations:
Funding an ILIT generally involves making annual gifts to the trust.
Proper administration is essential to ensure those gifts qualify for available gift tax exclusions.
Is an ILIT Right for You?
An Irrevocable Life Insurance Trust is not appropriate for every family. However, it may be an excellent planning strategy if you:
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have a potentially taxable estate;
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own a closely held business;
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wish to provide liquidity for your heirs;
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want greater control over how life insurance proceeds are distributed;
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have young children or financially inexperienced beneficiaries; or
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desire additional asset protection and long-term wealth preservation.
Like other advanced planning strategies—including Grantor Retained Annuity Trusts (GRATs), Charitable Remainder Trusts (CRTs), Family Limited Partnerships (FLPs), Family LLCs, and Buy-Sell Agreements—an ILIT should be carefully coordinated with your overall estate plan, tax strategy, and long-term family objectives.With thoughtful planning, an ILIT can help preserve family wealth, provide financial security for future generations, and ensure that your life insurance proceeds are used exactly as you intended.
Serving Families Throughout Volusia & Flagler Counties
Kaney Law proudly assists clients with estate planning throughout Volusia & Flagler Counties: including, but not limited to:
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Daytona Beach
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Ormond Beach
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New Smyrna Beach
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Flagler Beach
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Beverly Beach
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Ponce Inlet
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Palm Coast
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Port Orange
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Edgewater
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Deland
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Deltona
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