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What is an ILIT? Irrevocable Life Insurance Trust Explained


Planning for the future is crucial, especially when it comes to protecting your loved ones after you’re gone. One powerful tool that individuals use to safeguard their family’s financial security is the Irrevocable Life Insurance Trust (ILIT).

An ILIT is a specialized trust created to own life insurance policies, providing financial protection for beneficiaries upon the insured individual’s passing. The primary goal of an ILIT is to remove life insurance proceeds from the insured’s taxable estate, thereby reducing estate taxes and ensuring the smooth transfer of assets to heirs.

This article will help you understand life insurance trusts and discuss the advantages and disadvantages of an ILIT.

Understanding Irrevocable Life Insurance Trusts

An ILIT is a living trust set up to own a life insurance policy. You can transfer the ownership of an existing policy to the ILIT after it’s formed, or the trust can purchase the policy directly. The trust has to be irrevocable, meaning you must “fund” it, place the policy into its ownership, and then relinquish all rights to make changes to or dissolve the trust. 

Components of an ILIT

Before we go further into ILITs, it’s essential to understand the three components of an ILIT:

  • The grantor is you, the person creating the trust.
  • The trustee is the person who manages the trust on your behalf. The grantor appoints the trustee, which can be an individual or a corporate entity. As the grantor, you cannot serve as the trustee for the trust.
  • Trust beneficiaries are those you name to receive assets in the trust after your death. The ILIT will direct the trustee on how and when beneficiaries will receive the assets after your death.

Advantages and Disadvantages of an Irrevocable Life Insurance Trust

The Irrevocable Life Insurance Trust offers several advantages and disadvantages to consider before establishing one.

Advantages of an ILIT

  • Estate Tax Reduction — The primary advantage of an ILIT is reducing the size of the taxable estate. Life insurance proceeds owned by the trust are typically not included in the insured’s estate for estate tax purposes, potentially saving a substantial amount in taxes.
  • Asset Protection — Assets held within an ILIT can be protected from creditors in certain situations, ensuring that the intended beneficiaries receive the benefits without interference from outside claims.
  • Control Over Distribution — The grantor can dictate how and when the trust assets are distributed to beneficiaries, ensuring the funds are used according to their wishes. This control extends beyond the grantor’s lifetime.
  • Privacy — Unlike assets passing through a will, which become part of public records during probate, an ILIT provides privacy as the trust’s terms and beneficiaries generally remain confidential.
  • Circumventing Probate — Life insurance proceeds within an ILIT can bypass probate, allowing for a quicker and more efficient transfer of assets to beneficiaries.

Disadvantages of an ILIT

  • Irrevocability — Once established, an ILIT is generally irrevocable. The grantor loses control over the assets transferred to the trust, and modifications or reversals are typically not allowed. An irrevocable trust cannot be dissolved after you’ve set it up. However, since premiums must be made to keep the life insurance policy active, you could cancel the trust by stopping premium payments on the life insurance policy.
  • Complexity and Administration — ILITs can be complex to set up and manage. They require adherence to legal formalities, ongoing administrative tasks, and trustee oversight, which may involve costs and time commitments.
  • Gift Tax Implications — Funding an ILIT involves making gifts to the trust beneficiaries. Depending on the amount transferred, it could trigger gift tax consequences. Proper planning and understanding of gifting limits are essential.
  • Trustee Selection — Choosing the right trustee is crucial. If the trustee is not competent, lacks integrity, or fails to manage the trust effectively, it can lead to issues in the administration and distribution of assets.
  • Costs — Establishing and maintaining an ILIT may involve costs such as legal fees, insurance premiums, trustee fees, and ongoing administrative expenses, which should be considered against the potential benefits.

Still Have Questions? Turn to Brackin Law Firm

An Irrevocable Life Insurance Trust is a powerful estate planning tool that provides tax benefits, asset protection, and control over the distribution of life insurance proceeds. However, establishing an ILIT requires careful consideration of legal, financial, and personal aspects. Consulting with legal and financial professionals experienced in estate planning is highly recommended to ensure an ILIT aligns with specific goals and circumstances.

Brackin Law Firm has been trusted by families in Baldwin County for over 35 years. Our firm offers a broad range of services, allowing us to provide many different legal services for clients. And most importantly, we listen. We know that every client’s circumstances are different. We craft a detailed plan from our first consultation to be attentive to the needs of our clients every step of the way.

Contact us today for a consultation.

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