Amongst the numerous estate planning tools, an irreversible life insurance trust, or ILIT, offers numerous advantages with few disadvantages. The main objective of an estate plan is to identify how you wish your possessions to be dispersed upon your death; nevertheless, there are typically important secondary objectives and factors to consider.
Preventing estate taxes, if you have a large estate, is frequently one of those considerations as are avoiding probate and protection from financial institution claims. An ILIT can often assist you accomplish both of those goals.
An ILIT, as the name suggests, is a trust that can not be changed, customized or revoked by you, the grantor. This is among the biggest drawbacks to an ILIT. When you make the decision to create and fund an ILIT, you can not alter your mind. In addition, when you have named beneficiaries to an ILIT, they can not be altered either. Another drawback to an ILIT is that, sometimes, a pre-existing life insurance coverage policy does not get approved for the protection from estate taxes offered new policies. Consult your estate planning attorney concerning present laws.
The principal advantage to an ILIT is that the proceeds from a life insurance coverage policy acquired by or moved to the ILIT are exempt to estate taxes. An ILIT runs much the exact same as any other trust. You, as the grantor, appoint a trustee to administer the trust and carry out the essential trust documents. The trust then ends up being a separate legal entity for tax functions. A preliminary gift of funds from you is then used to purchase the life insurance policy. Recipients are called according to the trust terms. Each year, you gift additional sums of money to the trust. As long as your gift is less than the current yearly gift tax exemption,, your gift to the trust is also not subject to taxation or lowering your gift tax or estate tax exemptions. The funds from your annual gift are then used to pay for the administration of the trust and premiums for the life insurance policy. Upon your death, the policy advantages are then paid out to the beneficiaries. Because the policy was not owned by you, the earnings are exempt to estate taxes.
Other benefits of an ILIT are the avoidance of probate and protection from lenders. Once again, since the policy is not lawfully owned by you the earnings are not considered to be part of your estate. The proceeds are not held up in probate and can normally be right away paid out to the beneficiaries. However, because life insurance normally has a designated recipient, it typically passes outside probate. During your life time value may develop in the policy, however a policy in an ILIT can’t be reached by financial institutions.