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.
Frequently Asked Questions (FAQs)
1. What is an Irrevocable Life Insurance Trust (ILIT)?
An Irrevocable Life Insurance Trust (ILIT) is a special type of trust purposely designed to hold a life insurance policy. The policyholder establishes it and transfers the ownership of the policy to the trust. The ILIT, as implied by its name, is irrevocable; meaning, once it's set up, it cannot be changed or revoked without the beneficiaries' consent.
2. Why should I consider setting up an ILIT?
Setting up an ILIT in your estate planning can offer you several benefits. These include reduction in estate tax, as the policy's proceeds aren't included in the deceased's estate; protection of assets, as ILITs can safeguard the life insurance proceeds from creditors; control over fund distribution, as the trust document can specify instructions on how the proceeds should be distributed; and spendthrift protection, as an ILIT can manage the distribution of funds over time, especially useful for beneficiaries who may not be financially responsible.
3. What are the steps to set up an ILIT?
Creating an ILIT involves four key steps:
- Choosing a trustee who will manage the ILIT and ensure the life insurance policy remains in force.
- Working with an experienced estate planning attorney to draft the ILIT trust document which will outline the terms of the trust.
- Transferring the ownership of the life insurance policy to the trust, a crucial step to exclude policy proceeds from the estate for estate tax purposes.
- And finally, funding the ILIT sufficiently to cover the life insurance premiums.
4. Are there any downsides to setting up an ILIT?
While ILITs offer many benefits, they come with potential drawbacks that should be considered. The main disadvantages include the lack of flexibility, as it can't be easily changed once established; the complexity of setting up and administering, often requiring the assistance of an experienced estate planning attorney; and the funding requirements, which entail that the grantor must consistently fund the ILIT to cover the life insurance premiums.
5. Can I set up an ILIT on my own?
While technically possible, setting up an ILIT on your own is not typically recommended due to its complexity. It's usually best to work with an experienced estate planning attorney who can guide you through the process, help you understand the implications of an ILIT, and assist you in making the best decisions based on your specific circumstances and goals.
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.