Estate Read Time: 3 min

A Primer on Irrevocable Life Insurance Trusts

"I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money."
Entertainer Arthur Godfrey

The irrevocable life insurance trust (ILIT) can be an important estate strategy tool that may accomplish a number of estate objectives; however, it may not be appropriate for every individual.1,2

What Is an ILIT?

An ILIT is created by an individual (the grantor) during his or her lifetime. The ILIT owns a life insurance policy on the grantor’s life via the transfer of ownership of an existing policy or through the grantor’s annual contribution of cash to pay the premiums on a policy purchased by the trust.3

The grantor designates beneficiaries, usually family members, who will typically receive the proceeds upon the death of the grantor.

The trust is irrevocable, meaning that the grantor forfeits all rights to the property contained in the trust. Its irrevocable nature is integral to accomplishing the ILIT’s objectives.

What Can an ILIT Accomplish?

The ILIT may be able to accomplish several estate objectives, including:

  1. Meeting liquidity needs;
  2. Managing estate taxation on the policy proceeds;
  3. Providing income to survivors.

How Does an ILIT Work?

When you die, the trust is designed to receive a payment equal to the policy coverage amount, e.g., $500,000. Since the trust’s ownership of the policy is irrevocable, the proceeds are not considered your property. Consequently, they do not fall into your estate, thus potentially avoiding estate taxation. (Remember, generally no income tax is due on such life insurance proceeds.)4

The trust provisions should be set up to provide direction about how and to whom payments may be made. You may direct that the trust pay out cash to cover certain expenses, e.g., funeral costs, probate, taxes, final medical expenses, and debts.

This may obviate the need to sell less liquid assets at an inopportune time to cover such costs.

The trust’s beneficiaries may receive the proceeds (after any payments are made to satisfy liquidity needs), creating an inheritance free of estate taxes. Finally, creditors should not be able to attack these assets since they belong to the trust, not you.

Creating an ILIT should be done only with the assistance of a qualified estate planning attorney. It is a complicated exercise in which mistakes may result in losing the benefits ILITs offer.

1. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
2. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
3. Investopedia.com, 2021
4. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific estate or estate strategy. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

It May Be Time for a Financial Checkup

It May Be Time for a Financial Checkup

It’s never a bad time to speak with your financial professional about changes in your situation.

Bull & Bear Markets: A Timeline

Bull & Bear Markets: A Timeline

This helpful infographic will define bull and bear markets, as well as give a historical overview.

Father Knows Best

Father Knows Best

Financial behaviors you learned from dad may be influencing your own confidence in managing money.

 

Have A Question About This Topic?







Thank you! Oops!

How to Spend Again After Saving

When people save, it brings life rewards. But sometimes after being on your best money behavior for a long time, you want to cut loose and spend. It can happen whether you’ve been saving to buy a home, rejoined the workforce or survived a global pandemic.

Why Medicare Should Be Part of Your Retirement Strategy

How Medicare can address health care needs in your retirement strategy.

Whole Life Insurance Can Be an Asset For Balance

Even if you didn’t grow up on a farm, you’ve heard, “Don’t put all your eggs in one basket.”

View all articles

Bi-Weekly Payments

This calculator estimates the savings from paying a mortgage bi-weekly instead of monthly.

Contributing to an IRA?

Determine if you are eligible to contribute to a traditional or Roth IRA.

Long-Term-Care Needs

Determine your potential long-term care needs and how long your current assets might last.

View all calculators

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

View all presentations

When Do You Need a Will?

When do you need a will? The answer is easy: Right Now.

Emerging Market Opportunities

What are your options for investing in emerging markets?

What Can a Million Dollars Buy You?

$1 million in a diversified portfolio could help finance part of your retirement.

View all videos