An Irrevocable Life Insurance Trust (ILIT) is a trust specifically established to own your life insurance policy for you. You establish the trust by transferring ownership of your life insurance policy to the trust. The fact that it is an irrevocable trust means that it cannot be rescinded, changed, or amended after it is created. Once you put your life insurance in the trust, you cannot change the trust terms or get back ownership of the life insurance policy you placed in the trust.
You do, however, have great power as you are establishing the terms of the trust. You decide who will be the trust beneficiaries. You will select the trustee(s). You can choose successor trustees. You can define the terms under which your beneficiaries will receive trust benefits and be as specific and detailed as you wish. An ILIT offers many benefits, making it something you may want to consider establishing as part of the estate planning process.
Why Establish an Irrevocable Life Insurance Trust?
There are many reasons why someone would choose to have an ILIT. For instance, the tax benefits can make it an attractive option. Taking a life insurance policy and putting it in a trust will take the value of the insurance policy out of the equation for calculating estate tax liability. Because establishing the trust may effectively reduce your estate tax liability, you may not need as much insurance coverage because the estate tax bill will be lower. While your estate tax bill is lowered, you also have the option to designate the ILIT as the source for paying whatever remaining estate tax liability you may have.
The fact that you have the ability to establish the terms under which your beneficiaries will receive trust benefit distributions is very powerful. You can use the trust to ensure financial responsibility on the part of the beneficiaries. If you are worried about a beneficiary with poor spending habits or a history of addiction or alcohol abuse, you can put terms in the trust to account for these kinds of behavior and use distributions as an incentive for beneficiaries to stay clean and spend responsibly and only for specific purposes. If you intend to use the ILIT for this benefit in particular, be sure to clearly state your terms for trust distributions in the trust document.
An ILIT also serves as a form of asset protection for beneficiaries. The interest they hold in the trust will be protected from creditors and potential creditors such as those coming from litigated matters. The ILIT is not owned by the beneficiaries and this makes it very difficult for creditors to get access. An ILIT also helps protect beneficiaries who are reliant on need-based government aid as the trust is not included in income calculations due to the fact that the beneficiary has no control over trust distributions and the assets are owned by the trust.
Maximizing the Benefits of Estate Planning
There are a number of valuable tools you can put in place when you take the time to look to the future and set up an estate plan. At Verras Law, we maximize the benefits you can get from estate planning and work with you to develop an estate plan that meets your specific needs and goals. Contact Verras Law today.