Irrevocable Life Insurance Trust
An irrevocable life insurance trust can be thought of as a container that holds your life insurance policy and removes it from your estate to avoid probate. The insurance trust consists of a contract used to administer the life insurance policy for the named beneficiaries. The primary purpose of an irrevocable life insurance trust is to exclude death benefits from estate taxation.
Once an irrevocable life insurance trust (ILIT) is established, the insurance policy is placed inside the trust and cannot be changed. However, you still have control over who the beneficiaries will be and outline the terms of how they will receive distribution of assigned benefits.
When setting up the irrevocable life insurance trust, you can elect to have proceeds from the policy immediately paid out or specify monthly or annual distributions. Or, you can elect to have distributions made when beneficiaries reach certain milestones such as graduating from college, getting married, or buying their first home.
Irrevocable life insurance trusts allow the policy owner to build in flexibility such as allowing the Trustee to provide distributions when beneficiaries need it for a specific purpose. This might include starting a new business or a profitable investment opportunity.
ILIT's are the perfect choice to assign policy distributions to heirs who receive government assistance. Life insurance distributions can be controlled so as not to interfere with the beneficiary's ability to receive government aide or benefits.
An irrevocable life insurance trust provides you, your heirs and estate with numerous tax advantages. One of the primary tax advantages of irrevocable life insurance trusts is the annual "gift tax exclusion".
ILIT's allow the policyholder to "gift" up to $10,000 per year to anyone they choose. This gift is completely gift-tax free. Policyholders can give $10,000 per year to as many people as they want. Married couples can gift up to $20,000 per person, per year. The only requirement is that the recipient of the gift must have access to the money now, not sometime in the future.
The annual life insurance premium payment is considered a gift to the named beneficiaries. As long as the premium payments equal no more than $10,000 per beneficiary (or $20,000 for married couples), no gift taxes will be owed.
Executing an irrevocable life insurance trust is complicated and generally requires the assistance of an estate planning lawyer. There are many things to consider including who will administer the trust, who the beneficiaries will be, and how the funds will be distributed. Since the ILIT cannot be altered once it is executed, careful consideration should be taken to ensure the trust is constructed according to your wishes.