ILIT: Irrevocable Life Insurance Trust

What is an ILIT?

An ILIT is an Irrevocable Trust created specifically to hold life insurance policies.

The person who forms the trust is called the “Grantor,” and the individuals who benefit from the trust are the “Beneficiaries.” The Irrevocable Life Insurance Trust is nothing more than paper, so it needs a person to carry out its terms. That individual or entity is called the “Trustee.”

What is the Purpose of an ILIT?

In the past, the primary goal of the ILIT was to avoid Death Taxes. But, it is a versatile trust and can serve many purposes including divorce planning, buy/sell agreements, blended family planning and more. Easy to form and readily recognized by the IRS, and ILIT makes up a portion of many estate plans.

Irrevocable Life Insurance Trusts Pros and Cons

Pros:

• Creditor/Divorce Protection for your Spouse: After your death the life insurance becomes cash. The ILIT can hold the money in a further, protective trust for your surviving spouse sheltering it from creditors and future spouses.
• Creditor/Divorce Protection for your Descendants: The ILIT is an Irrevocable Trust, but at your death, it can continue as one more other Irrevocable Trusts. These trusts can protect your descendants from their legal entanglements, creditors, and divorces.
• Reducing Death Tax Liability: Including avoiding state death tax at the second spouse’s death.
• Keeping Assets within the Family: The ILIT can limit beneficiaries to your spouse and descendants. For example, life insurance to a son may end up with a daughter-in-law at his death, but an ILIT can make sure the life insurance passes to your grandchildren instead.
• Special Needs Trust Planning: The ILIT can be drafted to provide care for a Special Needs Person without disqualifying that person from needs-based government benefits.
• Sheltering Cash-Value Insurance: While in some states, the cash value in your life insurance can be seized by creditors. An ILIT can provide shelter.
• Dynasty Trust: An ILIT can be set up as a Dynasty Trust, providing care for you descendants forever.
• Privacy: An ILIT is not part of your probate estate, so it will not be publicly listed.
• An ILIT can be designed to avoid future state income taxes.
• Divorce Planning: An ILIT can hold life insurance subject to a divorce agreement and name both spouses as trustees. In this way, both spouses control premium payment and beneficiary designations.
• Avoid Probate Delays: With an ILIT, life insurance is available as soon as the policy pays out, avoiding delays due to a minor child or the estate being beneficiary.
• Reducing Executor’s Fees: If the life insurance pours into the estate, the executor may receive a higher fee. Life insurance in the ILIT is not part of the Probate estate, so the executor receives no fee based on its value.
• Buy/Sell Agreements: An ILIT often is part of a buy/sell agreement, providing a clear roadmap for quick exchange of life insurance proceeds for the company shares.

Cons:

• Loss of Control: The ILIT will own the policy, not yourself. For most people, this is not much of an issue, as the life insurance benefits arrive after your death.
• Cost: though not terribly expensive, crafting an ILIT to your specific needs and situation does take time, so there will be some expense.
• Need for Keeping Up With the Law: The law is always changing, and nothing is guaranteed. Techniques that work today may not work tomorrow. Over the years you will have to keep up with changes to make sure the ILIT is still providing the advantages you had hoped to gain.

Example:

If a Pennsylvania resident named his wife as beneficiary of his $1M life insurance policy, no Inheritance Tax is due at his death. But, at the wife’s death, the $1M is now cash subject to the tax. Before the children receive the $1M, a $45,000 tax is due. The ILIT avoids the tax entirely.

Typical Estate Questions About Irrevocable Life Insurance Trusts:

Here are some questions clients, beneficiaries, and Trustees ask:

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If you have any questions about Irrevocable Life Insurance Trusts or any other estate administration topics, please contact us to schedule a free consultation. For more than two decades Klenk Law has focused only on Estate Law. We’ve seen it all, and this experience allows us to explain complex estate law and planning techniques clearly and concisely. We make it easy for you to understand ILITs so you can make the best decisions for yourself and your family.