An irrevocable life insurance trust (ILLIT) is an estate planning tool that owns and controls a permanent life insurance policy or policies while the insured is alive.
The parties in an ILIT are the grantor, trustees, and beneficiaries. The grantor is the individual that sets up the trust and is responsible for funding the trust. Unlike the revocable trust, he or she cannot make any changes to the irrevocable trust once it’s been set up.
The trustee is responsible for the distribution of proceeds and management of the trust while the beneficiary is the person legally designed to receive those benefits once the grantor passes.
Using an irrevocable life insurance trust can have several advantages. Listed below are two benefits you should consider if you’re contemplating adding an ILLIT to your estate plan.
Minimizes Estate Taxes
First and foremost, an ILIT can be used to minimize estate taxes.
When the grantor purchases life insurance, they immediately set up beneficiaries up to receive a sum of money called the death benefit when he or she passes away. These proceeds generally aren’t taxable, but they do form part of the person’s estate value.
If the estate is significantly high and valued over the exemption limit, the grantor’s beneficiaries will owe estate taxes, which can decrease the amount of inheritance they receive.
Wealthy individuals with large estates usually opt for irrevocable life insurance trusts to reduce the size of their taxable estate.
Distribution of Proceeds
ILITs allow the grantor to equalize inheritances if he or she would like to pass a single asset such as a family business, to one child, yet leave equal value to other children. This is another wonderful benefit of an irrevocable life insurance trust – it offers grantors great control over asset management and distribution.
For example, if for some reason you do not want your beneficiaries receiving a lump sum payout of your life insurance, you can include specific instructions for the trustee on how you would like for them to distribute those benefits.
Bottom Line
An ILIT can be beneficial if you have a significant amount of wealth and assets you need to protect after you pass. As stated previously, it can help you avoid significant estate tax and guard your assets against creditors. However, setting up a trust can be a confusing process.
If you’re considering adding an irrevocable life insurance trust to your estate plan, contact Botti & Morison Estate Planning Attorneys, Ltd.. Attorneys Christopher Botti (a Board-Certified Specialist in Estate Planning, Trust and Probate Law) and Paul Morison have over 90 years of combined experience helping clients form effective estate plans in California. We can answer all of your questions and help you get started.
Please call (877) 585-1885 to set up your first consultation for free. Botti & Morison Estate Planning Attorneys, Ltd. has offices in Ventura, Westlake Village, Santa Barbara, Valencia, Bakersfield, and San Luis Obispo, California.