For many who are venturing into the complex but worthwhile field of employing trusts in their estate plan, life insurance is an asset that presents some unique challenges. Without taking proper precautions, a life insurance policy can present just as many problems as intends to solve for the survivors of a policy holder.
To make life insurance as effective a tool as possible, many estate plans have taken to using a very specific kind of trust -- the Irrevocable life insurance trust.
The ILIT is an excellent tool for two primary reasons. First, it allows the policy holder and creator of the trust to remove the death benefit value of the policy from his or her personal estate. This is enormously important for tax reasons. If, for instance, policy worth one million dollars is held directly by the decedent, then the value of the decedent's estate is suddenly increased by a very taxable one million dollars up on his or her death.
This will mean that the probate system will take a sizable chunk out of the value of the policy and tie up the funds for a significant amount of time before the proceeds of the policy are passed on to the decedent's assigned beneficiaries.
Second, without some specific terms of distribution through a trust, then beneficiaries may experience some very adverse effects of seeing their personal income suddenly increase. The most common issue this presents is disqualifying a beneficiary from eligibility to continue receiving certain government benefits, such as Medicaid.
In the big picture, while it may seem like a great thing to suddenly be, let's say, $100,000 richer, that increase in personal worth may mean that a beneficiary may no longer receive benefits that will in a short time exceed the value of the inheritance.
Through careful planning, an ILIT can be used to protect your beneficiaries from being unintentionally harmed by your great generosity, and also ensure that your intended recipients that ones who actually benefit from your forethought. If you are ready to set up a properly constructed trust, an experienced attorney can assist you in creating the best document for your needs.
Source: findlaw, "The Irrevocable Life Insurance Trust," accessed Dec. 22, 2016