9 Tips Irrevocable Life Insurance Trust
People often think of life insurance as “tax-free,” but that’s not entirely true. Life insurance proceeds generally are income tax-free to your beneficiaries, but if you own the policy at your death, the proceeds may be subject to estate taxes.
One of the best ways to keep life insurance out of your taxable estate is to place the policy in an irrevocable life insurance trust (an “ILIT”).
The following top ten tips about Irrevocable Life Insurance Trusts (ILIT) are so important, that the failure to comply with any one of them can not only cause the estate plan to be ruined, but can cause a death tax on the life insurance proceeds, even though they are held in the ILIT.
- DO NOT make the insured the trustee or the beneficiary of the ILIT.
- DO make sure that the ILIT is the owner and the beneficiary of the life insurance policy.
- DO make sure that the beneficiaries have Crummey powers, allowing them to withdraw contributions made to the ILIT so no adverse gift tax consequences occur.
- DO make sure that the insured’s contact with the insurance company is kept to a minimum.
- DO make sure that the trustee is given the right to loan or sell to, as well as borrow or purchase from, the insured’s estate or other trust created by the insured.
- DO make sure that the trust allows contributions to the trust to be made by persons other than the person creating the ILIT.
- DO NOT have the insured pay the insurance premiums; the trustee should make all premium payments.
- DO make sure that the ILIT obtains its own federal taxpayer identification number.
- DO make sure that you have sat down with your Advisor and discussed allocating a portion of your generation-skipping tax (“GST”) exemption to the ILIT so as to avoid GST to the trust and its beneficiaries at a later date.
How an Irrevocable Life Insurance Trust is established?
The Irrevocable Life Insurance Trust can be established in this way:
- Your lawyer draft a trust agreement;
- You transfer money or assets to the trust annually or in a lump sum;
- Trustee of the ILIT uses the assets and purchase life insurance on your life, your spouse’s life, or both. You have to make sure that trustee purchases and owns the policy, not you, in order to make sure that the policy will not be included in your estate (to avoid estate tax);
- The trust will be a payer, owner, and beneficiary of the life insurance policy. Then the trust will receive the policy proceeds without being subject to estate tax and income tax.
Life insurance is a powerful estate planning tool. It creates an instant source of wealth and liquidity to meet your family’s financial needs after you’re gone. To shield proceeds from estate taxes, consider transferring your policy to an ILIT.
A financial advisor can help you with tax planning and choosing the right amount of life insurance, but you need an attorney to set up a trust.
If you are interested in establishing an Irrevocable Life Insurance Trust (ILIT) and need a Life Insurance Policy or if you have a Life Insurance Policy and needs review, please contact us at
Florida 813 964 7100
New York 716 565 1300
Questions? Email us at firstname.lastname@example.org
Why do you want extra money to go to the IRS when you can use this tool and maximize the amount of money to go to your beneficiaries instead of the IRS?
Contact us TODAY! Call us at 813 964 7100 or 716 565 1300
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