Irrevocable Life Insurance Trust (ILIT)

irreocable life insurance trust

People purchase life insurance plans for fear of the unknown. People worry about how their families will survive in case of unexpected death. Although we cannot know how our families will manage the loss, we can do something about their financial stability. Purchasing life insurance can help us plan our finances effectively. That way, we can lessen our loved ones’ burden by replacing lost income and we can guarantee their dignity even after our passing.

Setting up an irrevocable life insurance trust is the best way to support your loved ones and protect your properties. It is a way to ensure that your financial planning efforts are not wasted. Establishing an Irrevocable Life Insurance Trust is incredibly easy now that the laws have changed. More and more money smart people want to get an irrevocable trust.

It is a life insurance trust that is a legal structure commonly used to protect the estate. From the word itself, an Irrevocable Life Insurance Trust is irrevocable. You cannot modify the terms once it was already set up. An irrevocable life insurance links three parties: the grantor, trustee, and beneficiaries. The grantor is the insured party, but the trust is the owner of itself. Once the grantor dies, the death benefit goes to the trust and not directly to the beneficiaries. 

The trustee distributes the benefits among the beneficiaries according to how the terms of the trust were outlined. The grantor can decide whether the death benefit shall be invested in the stock market or be used as payment for property tax and other family expenses. The type of insurance policy in an ILIT solely depends on the grantor. It can be a whole life plan, survivorship, or term life.

What Are The Advantages of An Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust allows you to have control over your money even after death. Because the trust is not funded under your name, your unpaid debts or outstanding taxes will not affect the amount of your legacy. People with high net worth benefit more from an Irrevocable Life Insurance Trust. Properties inherited under ILIT are not considered as an estate. Hence, it can stay away from probate and estate tax. An irrevocable life insurance trust is there to set aside money for your family’s funds when they need it the most. Irrevocable Life Insurance Trust also guarantees that a family member with special needs receives due help from the government while reaping the trust plan’s benefits. When you die, even the trustee cannot change your terms. 

How Can I Set Up An Irrevocable Life Insurance Trust?

ILITYou can set up an Irrevocable Life Insurance Trust by creating a trust as the “grantor” and choosing the beneficiaries of the trust. It is helpful to select a trustee to control the trust on your behalf. Beneficiaries do not need to be people. It can be a school, a charitable organization, or other institutions, and you can appoint them both as an owner and the beneficiary. One can give it as a gift to the trust so that the trustee can buy a life insurance plan for you. The amount of your gift should be equal to the yearly gift tax exclusion multiplied by the number of your beneficiaries.

The trustee will manage the trust. They are responsible for implementing the terms of the trust which you designed. The trustee will be the one to handle everything when you die and divide it among your beneficiaries based on how you planned it. The trustee has your permission to pay out whichever expense you wish to pay after your passing. For instance, the trustee can use your money for your final expenses and property taxes. The outstanding amount can be invested or divided among the beneficiaries. In other words, the role of a trustee is to make your wish happen. A trustee uses the fund for your family’s best interest.

The beneficiaries are the ones to receive your wealth when you die. A wise decision is crucial when selecting a beneficiary. If you ever appoint your property as a beneficiary, you are subjecting your wealth to property tax and probate charges.

Do I Need An ILIT?

An ILIT suits you if:

  • you have a large amount of asset
  • you have a special property plan
  • you have a family member with special needs
  • you want to avoid risks

irrevocable life insurance trustWhen you pass away, every property under your name will count as an estate. An estate is subject to court decisions, probate fees, and taxes. If you get an Irrevocable Life Insurance Trust, then you can avoid hassle and deductions. Your money will stay intact for your family’s advantage. You can plan your trust to fund your grandchildren’s education or give it as a gift to your children. If you plan the terms wisely, rest assured that your family reaps the benefits of your labor and uses the fund based on your morals.

Someone with a special needs family member can secure their loved one’s good quality of life through an ILIT. While the government supports people with special needs, an Irrevocable Life Insurance Trust can guarantee massive and more convenient support. A trust can directly pay for the medical expenses of a loved one. One can also use the fund for holiday trips, recreation, and other essential care not covered by regular health insurance. 

ILITs and Young Beneficiaries

children and ilitsIf you have children, you should consider an Irrevocable Life Insurance Trust even more. In the case of your untimely death, your insurance money cannot be handed directly to a minor. Your insurance firm will follow the rule of court and let the court assign a guardian who will manage the inheritance of your child. To avoid this slow process and the associated fees, you can use an ILIT.

Your appointed trustee will manage the inheritance for your child according to your plan. So, your legacy will not be disbursed until your scheduled period. Also, you can use a similar strategy through a Uniform Transfers to Minors Act (UTMA) account. A UTMA account is less expensive. However, when your child reached 18 or 21, they are required to take the money. Most children this age is not yet knowledgeable of financial management. Therefore, it will be irresponsible to give a tremendous amount of wealth to them. Irrevocable life insurance enables you to secure your children’s inheritance from their misuse.

Establishing A Successful ILIT

Since Irrevocable Life Insurance Trust offers a lot of advantages, you can assume that they are expensive and hard, and you are right. Firstly, find an attorney you can trust. While you can plan the Irrevocable Life Insurance Trust yourself, an expert estate planner’s guidance will prove beneficial and worth the pay. You can make avoidable mistakes if you plan on your own, but you can save more with a specialist.

After you found your trusted attorney, you can now appoint your beneficiaries. It is good to designate a trustee and draft the trustee’s terms of the trustee needs to implement.

You are in the authority of your money, and you can choose the mode of paying the beneficiaries. The amount and schedule can vary per each beneficiary. For instance, you want your selected school to receive an annual amount while you enjoy a charity to receive a lump sum immediately after you die. You could give money to your child once they enter college or when they marry. You can authorize the trustee to provide extra money in case a beneficiary asks for a particular objective. Every term on your plan is up to you.

Choosing My Trustee

You or your spouse cannot be your ILIT’s trustee. Once you appoint yourself as a trustee, you are defeating the purpose of an Irrevocable Life Insurance Trust. Putting the trust under your name will expose your funds to estate taxes. That said, you need to designate an unbiased and objective person as your trustee. Your beneficiary cannot be your trustee at the same time.

What Should You Consider In Choosing a Trustee?

If the importance of a trustee is not yet emphasized enough, let’s break it down again. A trustee supervises your trust on your behalf. He implements the terms you drafted for the trust. Your trustee receives your pay while you are still alive and uses this money to pay your insurance. When you die, the trustee will claim your death benefits from the insurance carrier and use the money based on your wishes.

ILIT LawyerBecause the trustee has a significant role, selecting a trustee is extremely difficult. You need to wholeheartedly believe that your trustee will implement the terms as you ordered. The best person is someone you dearly trust, like a family member or a friend. You can also hire a professional trustee like a lawyer or a firm. It will be essential to think that there will be conflicts regarding your properties, beneficiaries, and allotment of assets.

How Should I Pay for the Yearly Premium?

The grantor pays yearly premiums through the trustee, and the trustee delivers the pay to the insurance company for whatever type of policy used in the Irrevocable Life Insurance Trust. The grantor must abide by the rules of the IRS gift tax to ensure tax-free gifts. The gift tax guideline is pretty simple. The gift tax exclusion in 2017 states that a person may give someone $14,000 annually, free of tax. If a husband and wife gift a person $14,000 each, the gift can amount to $28,000 for a couple, you just need to fill out a claim against one’s lifetime estate tax exemption. The number of people you can gift is limitless.

Funded ILITs

Aside from paying premiums yearly, can you choose a different payment arrangement? Yes, and that is called a funded ILIT. Most ILITs are unfunded, meaning that the payments come from the insurance policy only. A funded Irrevocable Life Insurance Trust has funds from supplemental assets and the life insurance plan. The assets can come from different investment vehicles such as stocks or bonds that can partly cover the insurance plan’s payments.

Only a few people use funded ILITs because it is linked to tax incidence. The profit from ILIT’s investments is subject to tax, attributable to the implementation of IRC 677(a)(3). The grantor must settle this tax burden, especially if he is a person of high net worth. Tax can grow into a huge sum.

A funded Irrevocable Life Insurance Trust has its pros and cons that you should weigh. For most people, funded ILITs are not very ideal.

Extra Steps for ILIT

When you set the Irrevocable Life Insurance Trust and have designated a life insurance policy within your Irrevocable Life Insurance Trust and pay for the fee, there are just a small number of different procedures to do to secure your ILIT’s success. When annual fees are settled, your trustee shall send out a “Crummey Letter.” It informs your beneficiaries that the trust has all the insurance payments. According to the law, the trustee must wait for a certain period, enabling the beneficiaries to claim the insurance. If they do not take out the money, they will be transferred straight to the insurance firm.

An Irrevocable Life Insurance Trust shall have its taxpayer identification number. It must also work under a particular bank account. If you paid for a separate life insurance policy that produces income from assets, you might have to put forward an income tax return for the ILIT, too. The best way to deal with these extra steps is to consult an estate planning attorney or a Certified Public Accountant.

Closing an ILIT

The termination of your life insurance trust depends on your terms. Your trust can become void the moment you fail to pay for the due yearly fee. You cannot change the ILIT’s possessor under your name. So, if you want cash value life insurance that you can get cash out for retirement and other unique goals, Irrevocable Life Insurance Trust is not for you. A cash value plan will suit you better.

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About Coach B.

After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.

In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.

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