ILIT stands for irrevocable life insurance trust, and it’s one powerful financial and estate planning tool you might want to consider.
An irrevocable life insurance trust, or ILIT, is a certain kind of trust that allows you to do two things:
- One, to create and manage life insurance policies (term or permanent) during your lifetime;
- and two, to handle distribution of the funds upon your death.
It can be a valuable tool for estate planning, and is often used alongside (and sometimes in lieu of) a will. You’re already familiar with the purpose of a regular (or revocable) trust, which exists to hold your assets for your someday heirs. With irrevocable trusts, the asset is a life insurance policy.
Funding the trust means purchasing a new life insurance policy or transferring ownership of an existing policy to the ILIT. Because there are some complexities involved, it’s best to involve your tax professional in forming an ILIT.
The terms of an ILIT cannot legally be altered, amended, or rescinded once it’s created (without permission of the grantor or the beneficiaries).
Here are some questions you should ask to help determine whether or not an ILIT is right for you. Of course, your tax professional and financial advisor will both be good resources in making the decision. As with any financial decision, be sure to seek them out.
Are you concerned about reducing the size of your taxable estate?
A lot of investors don’t realize that upon their death, their estates may include the death benefit payouts from their life insurance policies. Reducing the amount that must be paid in estate taxes is the primary reason many people choose an ILIT. An ILIT ensures that the value of the death benefit is not included as part of the gross estate (as long as the trust is funded three years or more before your death).
The current estate tax exemption is $11.7 million per estate (that’s a combined exemption of $23.4 million for married couples). If your assets plus your life insurance policy exceed that amount, then your estate would be subject to federal estate taxes. Note that many states have lower thresholds. (Arizona does not have an estate tax, so you would not have to pay estate taxes oto the state, no matter the size of your estate).
Would you like to avoid gift taxes?
An ILIT contains yet another way that you as a benefactor can prevent your heirs from having to pay taxes: It can help you avoid gift tax consequences if you use what are known as Crummey powers. Crummey power lets a person transform the status of a gift from one not eligible for gift-tax exclusion into one that is eligible for that exclusion.
In order to qualify for the annual gift tax exclusion ($15,000 per beneficiary) with an ILIT, you must indicate that the gift is part of the trust when it is drafted. If Crummey power is not included, the ILIT may trigger gift taxes.
Do you wish to protect your assets from creditors?
Asset protection is another reason some people consider an ILIT, whether to protect the death benefits from creditors of the grantor or the beneficiaries. ILITs are not owned by beneficiaries, so it’s not easy for the courts to link the assets to beneficiaries for creditor access.
Do you wish to set a financial policy for future generations?
If you’re concerned about financial irresponsibility on the part of any of the beneficiaries of the trust, or if you simply want to pass down financial values along with your assets, an ILIT is one way to do that.
A trustee would be appointed to supervise the trust and distribute the assets according to your wishes, as specified in the trust document. For example, you may appoint the trustee to distribute proceeds all at once, or upon beneficiaries achieving certain milestones (such as college graduation, home ownership, or becoming a parent).
Would you like to learn more about ILITs and find out whether or not one might be right for your financial situation? Our tax services and comprehensive financial planning services can help. Contact us today.
