You might know about the benefits of including trusts in your estate planning strategy. When you establish a trust and transfer ownership of certain assets to the trust, you have devised a way to protect your assets from estate taxes and probate court upon your death. There are many types of trusts, but this blog will focus on what’s known as an irrevocable life insurance trust (ILIT), sometimes referred to as simply a “life insurance trust.” The concept is similar to other types of trusts: the holder of the life insurance policy (the grantor) establishes a trust that becomes the beneficiary of the eventual payout. A trustee is appointed to ensure the trust’s instructions are carried out.
What’s the Point of an ILIT When You Already Have Beneficiaries for Your Life Insurance?
There’s a good possibility that you already have a life insurance policy (or several). In that case, you’re familiar with the fact that your policy or policies already have beneficiary designations. It might seem like just an extra step to establish an ILIT, but there are a few advantages to funding an ILIT:
- While life insurance policies often pass to beneficiaries outside of probate anyway, you are able to set terms on the ILIT and, by extension, the life insurance payout. In the absence of a trust, the beneficiary receives the money in one lump sum. You might not want this to happen for many reasons, especially if your beneficiaries are too young (but not minors). Instead, you can set conditions or milestones that must be met before your beneficiaries receive the money; for example, you could set aside a portion that can only be used to purchase a house.
- The contents of an ILIT can be insulted from your beneficiaries’ creditors. Again, giving your beneficiaries the entire amount at once can be risky. If that happens with your beneficiaries, the money could attach to judgments. However, funds still contained in the ILIT are safe from creditors.
- Naming an ILIT the beneficiary of a life insurance policy ensures that the proceeds are not included as part of the taxable estate. This can be a problem with especially large policies. Another benefit of avoiding estate taxes is that the estate’s personal representative has more money to pay other debts and liabilities.
Should You Create an ILIT?
This question is impossible to answer without a thorough review of your financial situation and overall estate planning goals. One potential drawback of an ILIT is that it is irrevocable, meaning you are stuck with its terms once it is established. And, although it can save your loved ones taxes, there are certain tax considerations that arise during your lifetime.
The team at Zamora, Hilman & Villavicencio is focused on helping our clients make an estate plan that preserves their assets and takes care of their descendants. We also help individuals navigate probate court and receive their inheritances in complex situations (such as beneficiaries’ residing in Cuba). Get in touch with us here through our website; we guarantee we will contact you back in a timely manner.
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