What Is an Irrevocable Life Insurance Trust?
An irrevocable life insurance trust (or “ILIT“) offers a life insurance trustee greater control over his or her policies and the money associated with the payout of those policies. The purpose of an irrevocable life insurance trust also enables you to reduce or eliminate estate taxes, so the bulk of your holdings can go to your intended beneficiaries.
Since many people do not know that the proceeds of their life insurance policies – namely, the death benefits – are subject to estate taxes, they act under the false impression that a policy’s cash payout will be free of taxation and transfer to a spouse or other loved ones without any complications.
This misunderstanding may be the result of a client who was told that life insurance is tax-free income. Problems worsen among married clients because of the mistaken assumption that the unlimited marital deduction is a permanent guard against any and all taxes. This deduction just delays the taxes due for death benefits until the second spouse dies.
An irrevocable life insurance trust agreement, particularly for clients with estates where taxes can consume as much as fifty-five percent of the proceeds from their respective life insurance policies, is a necessity.
Without the advantages of an irrevocable life insurance trust, clients may not have as much coverage as they need or believe they already own; or, these clients may be paying too much money for the coverage they have.
Do I Need a Trust?
An irrevocable life insurance trust definition is, by virtue of its very name, irrevocable. Meaning: You cannot typically adjust the terms, or the cost of an irrevocable life insurance trust, once you sign such an agreement. For some, this fact is the principal drawback of an irrevocable life insurance trust.
Choosing Your Trustee or Beneficiary
Establishing an irrevocable life insurance trust requires a trustee. Neither you nor your spouse can be an irrevocable life insurance trustee, though an independent professional can serve as your trustee. That person should be an expert who understands how an irrevocable life insurance trust operates, and the terms and distributions that are part of this agreement.
Also, you cannot be the beneficiary of your own irrevocable life insurance trust. On the other hand, you can list your children as the beneficiaries of your irrevocable life insurance trust.
An irrevocable life insurance trust cannot be payable to your estate because of changes during the course of your life or additions to your will that would alter the proceeds of your life insurance policy, making your coverage subject to estate taxes.
Life insurance trust gift tax
The life insurance premiums (or “gifts”) you pay belong to the irrevocable life insurance trust. You cannot reclaim policies associated with the trust, nor can you use the cash values of these policies as retirement income.
Right now, you can make a maximum gift of $13,000 per recipient without any taxes. This rule only applies to gifts you enjoy or use in the present. Gifts in trust do not qualify because they are gifts of future interest, to be enjoyed, accessed or used later.
You can also make your irrevocable life insurance trust a means that provides each lifetime beneficiary with the option to withdraw his or her portion of the contribution, for a defined segment of time, after the submission of each contribution.
The death benefits may subsequently go to your family or be held in trust, or act as the source to buy assets from your estate or your irrevocable living trust.
A Reminder: Consult an Experienced Professional
Before and during the creation of your irrevocable life insurance trust, you should seek the guidance of an independent expert. You should have a professional with the intelligence and wisdom to make this process as seamless as possible.
That expert should answer whatever questions you have regarding the advantages, terms, and drawbacks or restrictions of signing an irrevocable life insurance trust.
With that help, you will have the clarity you need and the peace of mind you deserve when finalizing an irrevocable life insurance trust.