What Is an Irrevocable Life Insurance Trust?

Creating a comprehensive estate plan is crucial to ensure that your assets are distributed according to your wishes after you pass away. One important tool to consider as part of that plan is an irrevocable life insurance trust (ILIT). An ILIT can offer several benefits, including potential tax savings and the seamless transfer of certain assets. An experienced attorney can provide guidance on the role that an ILIT may play in your estate plan, and they can help you take steps to implement your plans and ensure that your wishes will be followed.

The Purpose of an Irrevocable Life Insurance Trust

An ILIT is a trust that is specifically designed to hold life insurance policies for the benefit of your chosen beneficiaries. By placing your life insurance policy into an irrevocable trust, you establish a separate legal entity that owns the policy rather than yourself personally. This arrangement has several important implications:

• Tax benefits: When properly structured, assets held within an ILIT may be excluded from your taxable estate upon death. This can help reduce or eliminate estate taxes that would otherwise apply.
• Creditor protection: By transferring ownership of the life insurance policy to the trust, it becomes shielded from creditors or lawsuits against you or any named beneficiaries.
• Control over distribution: An ILIT allows you to dictate how and when proceeds from the life insurance policy will be distributed among your beneficiaries. You can specify specific conditions or establish staggered distributions over time.

The Structure of an Irrevocable Life Insurance Trust

To establish an ILIT effectively, there are key components and steps involved:

1. Selection of a trustee: You must appoint an individual or entity to act as the trustee of your ILIT. The trustee is responsible for managing the trust and ensuring its compliance with applicable laws and regulations.
2. Funding the trust: You will transfer ownership of your life insurance policy to the trust, which becomes both the owner and beneficiary of the policy. This typically involves executing an assignment form provided by your insurance carrier.
3. Cash gifting strategy: To cover ongoing premium payments on the life insurance policy, you can make annual gifts to the ILIT that will then be used to pay policy premiums.
4. Crisscross purchase arrangement: In certain cases where spouses want coverage but do not wish to be insured on each other’s lives, a crisscross purchase arrangement may be created within two separate ILITs.

The Advantages of an Irrevocable Life Insurance Trust

There are several advantages associated with setting up an ILIT:

• Tax savings: An ILIT can often help reduce estate taxes by excluding assets from your taxable estate upon death. This allows more wealth to pass directly to your chosen beneficiaries rather than being diminished by tax liabilities.
• Asset protection: When properly structured, assets held within an ILIT can be shielded from creditors or lawsuits against you or your beneficiaries. This protection ensures that the intended beneficiaries receive the full benefit of the life insurance proceeds.
• Flexibility: An ILIT allows you to maintain control over how and when distributions are made to your beneficiaries.
• Preserving family harmony: An ILIT provides peace of mind by including protections like spendthrift provisions, which safeguard beneficiaries from making impulsive financial decisions that may deplete inherited assets.

Contact a DuPage County Estate Planning Lawyer Today

An irrevocable life insurance trust can be a useful tool that may play a key role in your estate plan. At the Gierach Law Firm, our Naperville irrevocable life insurance trust attorney can help you determine whether an ILIT will provide you and your family with tax savings and other benefits, and we can work with you to create a comprehensive estate plan that will meet your needs. Contact us at 630-228-9413 to set up a consultation and learn how we can provide you with peace of mind about the future.