Using Irrevocable Life Insurance Trusts in Estate Planning

 

An irrevocable life insurance trust (ILIT) is a legal instrument that manages how life insurance proceeds are treated for estate tax purposes. An insured person transfers ownership of his or her life insurance policy to the ILIT and appoints a trustee to manage it. When the insured person dies, the policy’s death benefit becomes the property of the trust and is distributed to the designated beneficiaries.

An irrevocable life insurance trust offers several advantages for estate planners as well as for beneficiaries. These are the major ones:

• Minimizing Estate Taxes — Placing a life insurance policy within an ILIT excludes the proceeds of the policy from the taxable estate of the deceased. This means that the beneficiaries can potentially receive a larger amount. This can be beneficial for estates that are near or exceed the federal estate tax exemption. The exemption is presently $13.61 million per individual. However, this threshold will expire at the end of 2025. Unless Congress acts to extend it, the exemption be reduced to $6.8 million starting in 2026.
• Leveraging Gift Tax Exclusions — When funding an ILIT, the premiums paid on the life insurance policy can be treated as gifts to the beneficiaries of the trust. These gifts can often be structured to fall within the annual gift tax exclusion limits, thereby reducing or eliminating the gift tax liability that would otherwise accrue.
• Avoiding Probate — Another significant advantage of an ILIT is the ability to bypass the probate process, which can be lengthy and expensive. Since the life insurance policy is owned by the trust, the proceeds go directly to the trust upon the death of the insured. Avoiding probate not only speeds up distribution of assets but also keeps the details of the estate private.
• Control Over Distribution — An ILIT provides control over how the life insurance proceeds are distributed to beneficiaries. The ILIT creator can set specific terms dictating the timing of distributions, the conditions under which beneficiaries receive funds and even what the funds can be used for. This level of control helps ensure that the funds are used exactly as intended, whether for educational purposes or living expenses or as a steady stream of income.
• Protecting Beneficiaries — Since the assets within an ILIT are owned by the trust and not the beneficiaries, these assets are shielded from creditors. Additionally, if the beneficiaries are not financially savvy or are too young to handle large sums of money responsibly, the trust can provide managed distributions that protect the beneficiaries’ long-term financial interests.

An estate planning attorney can provide vital assistance in creating an ILIT. An attorney can make sure that the trust is effectively structured to reduce tax liabilities and to meet your other goals. An attorney also can assist in creating wills, trusts, guardianships other essential estate planning documents. 

Jeffrey P. Hall, PLLC, with offices in Phoenix, Peoria, and Chandler, assists people across Arizona with achieving their estate planning objectives. To schedule your free initial consultation, call me at 480-409-5174 or contact me online.