Life insurance can help a family maintain its routines, preserve a business, or give loved ones more choices after a death. An irrevocable life insurance trust, or ILIT, can organize that support around your estate plan.
The trustee owns the policy and receives the proceeds, then follows the instructions you establish for your spouse, children, or other beneficiaries. Proper design may also keep the insurance outside the insured person’s taxable estate.
Three reasons to consider an ILIT
Family support. The trust can provide continuing management and distributions appropriate to the beneficiaries’ needs. That may be helpful for children, a spouse who would welcome assistance managing investments, or a beneficiary whose circumstances call for a supplemental needs trust.
Estate-tax planning. Insurance you own can be part of your taxable estate even when the death benefit generally qualifies for an income-tax exclusion. Proper trust ownership and limits on retained powers can address the estate-tax issue.
Liquidity. An estate may contain a valuable business or real estate while having relatively little cash. A suitably designed trust may lend money to the estate or buy assets on appropriate terms, helping the family manage obligations without rushing a sale.
How the policy reaches the trust matters
Having a trustee apply for and own a new policy differs from transferring a policy you already own. With an existing policy, a gift-tax valuation and the federal three-year rule need attention. A death within three years of a transfer can bring proceeds back into the estate-tax calculation under the applicable rules.
We review ownership and beneficiary arrangements before making changes. The policy’s tax value is not necessarily its cash surrender value, and a proposed sale of a policy introduces additional questions.
Funding and the annual routine
Cash contributions are often practical for paying premiums. If appreciated investments are proposed instead, we consider basis, a possible sale, and who will pay the resulting tax.
Many ILITs give beneficiaries temporary withdrawal rights to help contributions qualify for annual gift-tax exclusions. The rights must be genuine, and the trustee needs a consistent process for notice, the withdrawal opportunity, premium payments, and recordkeeping. Gift-tax returns may be required even when no tax is payable.
Income-tax reporting depends on the trust’s classification and activity. Many ILITs are grantor trusts during the insured’s life, and a different reporting arrangement may apply after death.
Protection suited to the beneficiary
Appropriate spendthrift and discretionary provisions can protect beneficiaries’ interests against certain creditor claims while assets remain in trust. The result depends on the rights granted and applicable exceptions. A beneficiary’s eligibility for needs-based public benefits also requires specific supplemental needs planning; ordinary ILIT language does not settle that question.
An ILIT’s administration should be designed around the people who will carry it out. Spiro can coordinate with your CPA and insurance professional so that ownership, premium funding, and the rest of your estate plan work together.
Read our complete guide to irrevocable life insurance trusts for detailed answers about funding, tax returns, trustee choice, and family protection.
Contact Verras Law to arrange an appointment in Palm Harbor, in Tampa or St. Petersburg by appointment, or by Zoom or teleconference.
Primary authorities: Internal Revenue Code section 2042 and section 2035. The full guide includes additional tax and Florida authorities.