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Irrevocable Life Insurance Trust (ILIT)

Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust (ILIT trust) is one option for transferring wealth to family members and the people you love. In layman's terms, you create this kind of trust when you transfer your life insurance policy to a trust to ensure those you love will have financial security. You may have a change of heart later, but canceling it won't be possible, as it's irrevocable.

Is opening one necessary? Yes, for some people. When people own estates, their estates are taxed after their passing. However, when you transfer your policy, it's no longer included as part of your estate. This means the tax laws that apply to them aren't the same.

Setting up a Trust for Life Insurance - How It Works

The main goal, of course, is to provide family and loved ones with financial security. Because there are specific regulations, an ILIT estate planning lawyer can advise you on how to get started. However, this is typically how a trust for life insurance works:

  • Establishment: The policyholder creates/establishes the ILIT trust and selects the beneficiaries.
  • Giving annually: The policyholder makes yearly contributions to cover the premiums of the policy.
  • Management: An appointed trustee is in charge of administrative tasks.
  • Payment: The insured's life insurance proceeds are deposited into the trust after their death.
  • Distribution: The trustee is in charge of giving the entire sum to those named as beneficiaries.

Are There Advantages?

The biggest advantage of creating irrevocable life insurance trusts is that you'll get to save on taxes. As stated, when you shift your life insurance policy outside of your estate, it is no longer considered part of the estate. This can lead to quite a bit of estate tax savings.

Another advantage is that you get to choose how the funds will be distributed. You can use these funds to help a family member buy a house, or you can pay for someone's education.

You'll get creditor protection when you create an ILIT. The trust won't be affected if your beneficiaries face financial difficulties or legal issues.

This kind of trust allows your beneficiaries to still access Medicaid benefits if they have special needs. Beneficiaries cannot be excluded from these programs because the trust's proceeds aren't "assets."

Any details about the policyholder's assets and debt become public records because probate is a public process. These funds, on the other hand, can be kept private with an ILIT.

What Are the Drawbacks, If Any?

While there are quite a few benefits, there are also some drawbacks you should consider.

  1. You are no longer in charge: You lose control of your policy once you transfer it. If your situation changes, you need to change beneficiaries, or you need to get cash, this could be a problem. Additionally, because it is irrevocable, changes aren't possible.
  2. Not adaptable: You can't change it without the beneficiaries' approval. This means that if your situation changes, it might be hard, or even impossible, to change details or even cancel it altogether.
  3. There is a gift tax: When you fund an ILIT, you do so by making annual gifts. These gifts go towards paying the life insurance policy premiums. However, you may need to pay a tax on the gifts, especially if they exceed the gift tax exclusion limit. To ensure you do not exceed the limit, contact an estate-planning attorney.
  4. Costs can add up quickly: There are costs associated with consulting an attorney, putting together the necessary documents, transferring your policy, and paying taxes on annual gifts.
  5. Cash withdrawals aren't allowed: You can no longer use the cash value of your life insurance policy after moving it into an ILIT. In effect, you give up direct access.

How Do I Put Together an ILIT?

It is best to hire an estate planning attorney to help you set up an ILIT trust because it can be difficult.

  • List your objectives: Find out why you're building this trust and what you want to get out of it. Find out what your beneficiaries will require and how you can assist them in achieving their objectives.
  • Choose a trustee: The selection of the trustee is the next step. You can pick a trust company, a professional manager, or a close friend who you think is reliable and trustworthy.
  • Compile the document: You can get help putting together the necessary legal document from an estate-planning attorney. All of the terms and conditions ought to be laid out in the document. Additionally, it must adhere to state laws.
  • Change your life insurance policy's ownership: You will no longer own your life insurance policy once you transfer ownership to the ILIT. The completion of a form to change ownership is required at this stage.
  • Deciding how the trust will be funded: How you pay for life insurance premiums is up to you and your estate planning attorney. Your attorney should be consulted regarding these particulars because there are tax limits to consider.
  • Performance: The trustee and beneficiaries ought to be kept informed of every step, and the ILIT document needs to be notarized.
  • Retaining confidence: The trustee will be in charge of managing the trust once you establish it. This includes managing all annual gifts, submitting tax returns, and keeping all records.

Have questions about irrevocable trusts? Contact Citadel Law at (800) 662-0882 today to find out more. One of our experienced estate-planning attorneys will be able to assist you in setting up a consultation.

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