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The ins and outs of an irrevocable life insurance trust

Life insurance is a common estate planning product owned by California residents. It provides estate planners with the peace of mind of knowing that their loved ones will be cared for in the event of their deaths. Life insurance can be used to support a family after the estate planner has passed, to replace his or her contributions to family income, to ensure that there is sufficient money to pay for a child’s college education, or simply to pay for one’s burial expenses.

However, it is important to keep in mind that life insurance can create some unique challenges from an estate planning perspective. Irrevocable life insurance trusts, or ILITs, seek to resolve many of these problems.

An ILIT is an asset holding device, just like any other kind of trust. However, in the case of an ILIT, this trust will own your life insurance police and thereby remove it from your estate. The ILIT is also irrevocable, so once you create it and fund it with the insurance policy, you cannot take it back to place under your name again. That said, you will be able to control other parts of your ILIT. For example, you can decide who the beneficiaries will be and you can define what terms exist for them to receive benefits after you have died. You can also select who the trustee of your ILIT will be.

The most important benefit of an ILIT comes in the way of tax savings because it will reduce your estate’s value considerably and thus reduce the tax liabilities applied to your estate. It will also help to protect your life insurance policy’s cash value from creditors who may seek to collect against your estate after you have passed. Finally, if you have a beneficiary who is receiving government aid, it will protect his or her ability to collect benefits.

There are numerous advantages that ILITs provide, but it is important to speak with a qualified estate planning attorney about your unique situations and goals before deciding whether this legal device is appropriate for your needs.

Source: FindLaw, “The Irrevocable Life Insurance Trust,” accessed Oct. 14, 2015


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