Life insurance can help you care for your loved ones, but if not properly understood, policies can sometimes create more problems than they solve. Find out how an irrevocable life insurance trust (ILIT) can be an essential part of estate planning, especially for those with large policies.
What is an ILIT?
An ILIT is a financial planning tool used to exclude life insurance proceeds from estate taxes. It does this by serving as both the owner and the beneficiary of life insurance policies.
How does it work?
Acting as a holding device, an ILIT removes your life insurance policy from your estate and simply owns it.
How permanent is an ILIT?
The “irrevocable” aspect of this policy is what sets it apart. You won’t be able to take back your policy once it’s been created and the ability to make changes is extremely limited.
How do you set one up?
After finding an attorney to help design the ILIT, you’ll determine the beneficiaries and how they will obtain the policy proceeds. You’ll also choose a trustee and decide if you’ll buy new life insurance inside the trust or if you’ll transfer an existing policy.
Are there any complexities to consider if transferring an existing policy?
If you choose to use an existing policy and then pass away within three years of the transfer, the policy will still be included in your estate and subjected to estate taxes.
Who should consider an ILIT?
This option is worth investigating for those with large estates. You may not see an ILIT as a good fit right now, but as estate tax laws are updated and your net worth fluctuates, it may be worth revisiting in the future.