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.