Many people buy life insurance for their survivors, but don’t realize that the proceeds of life insurance are included in the estate of the insured. An Irrevocable Life Insurance Trust (ILIT) can help you avoid this issue. An ILIT is an effective way to ensure that the proceeds from your life insurance policy will not be included in your taxable estate.

What Is an Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust (ILIT) is a way to reduce or eliminate estate taxes. This trust is comprised of three components – the grantor, the trustee, and the beneficiaries.

The grantor is the person creating the trust, which usually is you. The trustee is the person you select to manage the trust, and the beneficiaries are the people you choose to receive the trust assets once you pass away.

The trustee purchases an insurance policy in your name (or the name of the grantor), and names your beneficiaries. The trustee pays all insurance premiums. After you die, the trust receives the funds from the insurance company. The trustee will then make the funds available to pay any estate fees or taxes, and will then distribute them to your beneficiaries as planned.

Benefits of an ILIT

There are quite a few benefits to opening an ILIT. The first of which is the obvious tax advantages, as the proceeds of the insurance policy are not a part of your estate and are free from estate taxes. In addition, an ILIT provides the following benefits:

  • The ILIT doesn’t need to go through the probate process
  • Beneficiaries can use proceeds of the trust to pay any outstanding estate taxes
  • Insurance Trust proceeds can be protected from creditors of any beneficiary
  • If married, arrangements can be made for your spouse to receive income from the trust.

There are some drawbacks to ILITs, but generally speaking they are minimal. Most importantly, the trust is irrevocable, so no changes can be made to the trust once it is drawn. Furthermore, there is a small cost to write the trust, as well as annual maintenance and administrative fees. But these fees are only a small fraction of what you would pay in estate taxes without the ILIT.

If you are interested in setting up a trust, we can help you with the process. Please contact us today to learn more!