Estate Planning With Life Insurance Trusts


A man reading news paperLife insurance proceeds can be a large part of many people’s estate plan. One way to protect your assets and avoid paying an estate tax on the proceeds is to use an Irrevocable Life Insurance Trust (ILIT).

What is an Irrevocable Life Insurance Trust (ILIT)?

An ILIT is a trust you establish to buy and own life insurance policies on your life. The value of the policies and the death benefit proceeds are excluded from your taxable assets for estate tax purposes.

When you set up this type of trust, you can also set the terms for how policy proceeds will be held, administered and distributed for the trust beneficiaries.

How does an ILIT work?

After you establish the trust, you can transfer your existing life insurance policies to the trust or gift funds to the trustee to purchase a new policy. These policies will be owned by the trust, not you. You (or another donor) can transfer funds each year to pay the life insurance premiums.

At your death (or for a survivorship policy, the death of the survivor of you and your spouse), the insurance policy proceeds will be paid to the trust. The terms you stated in the trust agreement determine how the policy proceeds will be used or distributed. The proceeds can be:

  • Distributed to your beneficiaries outright
  • Held in trust for their benefit
  • Used to pay any estate taxes due at death

What are the advantages of an ILIT?

There are several advantages to using ILITs as part of an estate plan:

  • If the insurance policy is acquired by the trust or transferred to the trust more than three years before your death, the death benefit proceeds will not be included in your taxable estate and will pass to the trust free from estate tax.
  • Assets passing per the terms of an ILIT will not be subject to probate, a time consuming and expensive process.
  • Life insurance proceeds from a policy owned by an ILIT can be used to pay for any estate tax liabilities, expenses or simply to provide resources to beneficiaries.

Is an ILIT right for you?

When insurance policies represent a large inheritance for your beneficiaries, you may want to consider using an ILIT as part of your estate plan. As with any estate planning strategy, there are many considerations and rules that need to be followed for the strategy to protect your assets. It’s important that you consult with a tax advisor or an estate planning attorney to help you structure your trust accordingly.

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