At Heritage Law Office, our experienced estate planning attorney will thoroughly review your needs and wants when planning your estate and provide an outline of your best options, including the creation of an irrevocable trust. Contact us either online or at 414-253-8500 to schedule a free consultation today.
What is an Irrevocable Life Insurance Trust (ILIT)?
An Irrevocable Life Insurance Trust (ILIT) is a type of trust specifically designed to hold a life insurance policy. It is established by the policyholder, who transfers the ownership of the policy to the trust. As the name suggests, an ILIT is irrevocable, which means that once the trust is set up, it cannot be changed or revoked without the consent of the beneficiaries.
Advantages of an ILIT
There are several benefits to using an ILIT in estate planning:
- Estate tax reduction: By transferring the ownership of a life insurance policy to an ILIT, the policy's proceeds will not be included in the estate of the deceased, potentially reducing estate tax liability.
- Asset protection: ILITs can protect the life insurance proceeds from creditors, ensuring that the beneficiaries receive the intended funds.
- Control over distribution: The trust document can outline specific instructions on how the insurance proceeds should be distributed, providing greater control over the funds' distribution.
- Spendthrift protection: An ILIT can help protect beneficiaries who may not be financially responsible by controlling the distribution of funds over time, rather than providing a lump sum payment.
Setting up an ILIT: Key Steps
Creating an ILIT involves several essential steps:
Choose a Trustee
Select a trustee to manage the ILIT. This person will be responsible for administering the trust according to its terms and ensuring that the life insurance policy remains in force. The trustee can be a family member, friend, or professional trust company.
Draft the Trust Document
Work with an experienced estate planning attorney to draft the ILIT trust document. This document will outline the terms of the trust, including the beneficiaries, distribution instructions, and trustee powers.
Transfer the Life Insurance Policy
Once the ILIT is established, transfer ownership of the life insurance policy to the trust. This step is crucial to ensure that the policy proceeds are excluded from the estate for estate tax purposes.
Fund the ILIT
The ILIT must have sufficient funds to pay the life insurance premiums. Typically, the grantor (person setting up the ILIT) will make annual gifts to the trust to cover these expenses.
Potential Drawbacks of ILITs
While ILITs offer numerous benefits, there are potential drawbacks to consider:
- Lack of flexibility: Once an ILIT is established, it is irrevocable and cannot be easily changed.
- Complexity: ILITs can be complicated to set up and administer, often requiring the assistance of an experienced estate planning attorney.
- Funding requirements: The grantor must consistently fund the ILIT to cover the life insurance premiums, which may be a financial burden.
Contact a Knowledgeable Estate Planning Attorney
If you are considering an Irrevocable Life Insurance Trust as part of your estate planning strategy, it is essential to consult with a knowledgeable attorney.
At Heritage Law Office, our experienced estate planning attorney will help you determine if an ILIT is the right choice for your unique circumstances and guide you through the process of setting one up. Contact our attorney by using the online form or calling us directly at 414-253-8500.