An Irrevocable Life Insurance Trust (ILIT) is an estate planning tool used for a legal framework to transfer ownership of life insurance policies. The trust serves as the owner of the policy (beneficiary) and ensures the policy’s proceeds are distributed according to the wishes of the estate’s owner. There are various advantages to using an ILIT for estate planning, which make them an important consideration for individuals seeking to manage the taxes associated with their estates.
How Does an ILIT Work?
An Irrevocable Life Insurance Trust is a legal entity, which is established to hold a life insurance policy purchased by the grantor (the individual setting up the trust) and funded by a third party. The grantor will appoint a trustee who manages the trust and is responsible for administering the life insurance trust in accordance with the grantor’s stated wishes. When the insured dies, the trustee pays the death benefits to the beneficiaries personally—or according to the trust’s guidelines.
Advantages of an ILIT
Irrevocable Life Insurance Trusts come with a range of advantages for estate planning. Of most value to the grantor, an ILIT can be used to keep taxes and probate costs to a minimum. Because the trust is a separate legal entity, the life insurance proceeds will not be part of the taxable estate and won’t be subject to estate taxes. Another benefit is that the trust assets are usually not part of the grantor’s estate and, therefore, are not subjected to probate.
In addition to taxes and probate advantages, ILITs can also protect the trust from potential creditors, bankruptcy or divorce resulting in a decrease in the assets of the trust. Finally, ILITs can also be a secure way to protect an inheritance for children or grandchildren.
Conclusion
An Irrevocable Life Insurance Trust (ILIT) is an estate planning tool used to transfer ownership of life insurance policies in order to reduce taxes and probate costs. The trust serves as the owner of the policy and ensures the policy’s proceeds are distributed according to the wishes of the estate’s owner. An ILIT can help to protect the trust assets from creditors, bankruptcy or divorce, and also protect an inheritance for children and grandchildren. As such, an ILIT is an important consideration for individuals seeking to manage the taxes associated with their estate.