Irrevocable Life Insurance Trust Lawyers Dedicated to Offering Help in Cape Cod and The Islands
An Irrevocable Life Insurance Trust is a type of living trust created specifically to own a life insurance policy. An ILIT owns and controls both term and permanent life insurances in which the person insured is still living, and it also manages and distributes proceeds paid upon the insured’s death. An individual may purchase a life insurance policy in his or her name and then transfer it to the ILIT, or the trust itself can purchase the life insurance policy directly. Because the ILIT is a type of living trust, it must be funded, i.e., a life insurance policy must be placed under its ownership and premium payments must be made to keep the policy active.
What Are The Benefits of Setting Up an Irrevocable Life Insurance Trust?
There are many reasons why someone would find it beneficial to choose an ILIT as part of their estate plans. Most of them involve tax savings and asset protection. For example, let’s suppose you are the owner and insured. In this case, the death benefit of a life insurance policy gets included in your gross estate and becomes subject to taxation. But if the ILIT owns the life insurance policy, the proceeds from the death benefit are no longer part of the insured’s gross estate and are not subject to federal and state taxation.
An Irrevocable Living Trust also allows you to avoid Gift Taxes if the proper steps are taken. Since contributions by the grantor are considered gifts to the beneficiaries, any amount of contributions surpassing the yearly limit of $15,000 per person, per year would mean the grantor will be likely having to pay gift taxes. By using a document called a Crummey Letter sent to each beneficiary notifying them of their right to withdraw a share of the contributions for a 30-day period, after 30 days, the trustee can use the contributions to pay the insurance policy premium. The Crummey Letter basically makes the gift a present interest rather than future interest, and therefore allows the trustee to avoid filing a gift tax return for it.
For beneficiaries receiving government aid, an ILIT allows them to protect their eligibility to continue receiving benefits such as Social Security, Medicaid, or Disability. The trustee can control when and how distributions from the trust are used so as to not affect the beneficiary’s ability to receive his or her benefits. This is another advantage of setting up an ILIT if the trustee believes a beneficiary is currently receiving or may come to receive government benefits in the future.
An Irrevocable Life Insurance can also offer a certain degree of protections towards creditors for any cash value or death benefit that lies beyond the state’s threshold of protection. It is worth mentioning that distributions from an ILIT are not protected in that regard and may be subject to creditors, but any assets inside the trust are shielded from such external threats.
Besides Tax Savings and Asset Protection, What Additional Benefits Does an ILIT Provide?
An Irrevocable Life Insurance Trust also enables the grantor to have discretionary powers to control distributions and control when beneficiaries receive the proceeds of your policy. For example, you may choose to have the entire amount of the insurance proceeds go to one or all beneficiaries at one time, or specify that the money will be given to beneficiaries after they reach certain milestones in life, such as having a child, going to college or buying a first home, to name a few examples. As the grantor, it is really up to you to determine how the proceeds will be distributed and when, and such stipulations can be drafted into the trust. Additionally, it allows proceeds from your estate to be passed on to the next generations of your family without the obligation of paying GST (Generation Skipping Tax), which can be as much as 40% on both gifts and transfers in trust to benefit someone who is at least a generation younger than the donor.
What Steps Do I Need To Take To Find Out If An ILIT Is Right For Me?
There are many rules and complexities involved in setting up an estate planning tool such as an Irrevocable Life Insurance Trust, but when done properly, it can help you make sure that the policy will be used in the best way possible to benefit your family. At Boyd & Boyd, we offer our clients knowledgeable advice on all estate planning areas and can help you decide if setting up an ILIT is the right choice for you and your family.
Call us at (508) 775-7800 to request a free initial estate planning consultation to get started.