Hyden, Miron & Foster, PLLC Law Blog

Thursday, September 12, 2019

Life Insurance Trust

Trusts are an often overlooked estate planning tool as the main focus goes to wills. Trusts, however, have benefits that do not come with only having a will as part of your estate plan. There are many different types of trusts and each has unique purposes and benefits. One such type of trust is an Irrevocable Life Insurance Trust (ILIT).

What is a life insurance trust?

An ILIT is specifically established for the trust to take ownership of your life insurance policy or policies. If you already have a life insurance policy, you can transfer ownership to the trust. You can also set up the trust and then have the trust directly purchase life insurance. One of the largest advantages of an ILIT is the significant reduction in estate tax liability that may result. In order to reap the benefits, however, you have to do more than simply have the trust own the life insurance policy. You must waive your right to change the beneficiary on the policy, borrow against the policy, or use the policy as collateral for the purpose of obtaining a loan. Also, you may not serve as the trustee of the ILIT. 

The ILIT must truly be irrevocable, meaning that you cannot make any changes to it once it has been established. The only thing you can do with regard to the trust is to make sure the policy premium payments are made. You may also appoint the trustee of the trust. The beneficiary of the ILIT will be the ILIT itself which means when you die, the money will go directly to the trust. The trust, in turn, will hold the life insurance policy proceeds for the benefit of those you have named in the trust documents and distributed to them according to the terms of the trust.

As stated before, one of the main benefits of an ILIT is the reduction of your estate tax liability. This is why an ILIT is particularly attractive for larger estates. When a person passes away, his or her remaining assets are calculated to determine the total value of the final estate. While the current federal estate tax exemption is sizeable enough to protect the majority of estates from tax liability, larger estates are at risk of a substantial estate tax bill. Usually, a life insurance policy payout is included in calculating the value of an estate. If the life insurance policy is held in a properly structured ILIT, however, the value of the policy will not be included in the calculation. 

The fact that the life insurance proceeds will eventually be distributed to those named in the trust document according to the terms of the trust is another benefit of having an ILIT. You can structure payouts from the trust and condition the payouts in a way that protects those who stand to receive the money from spending all of it at once. If you have concerns about a person’s ability to properly manage the money, you may take steps to prevent them from mismanaging it by including terms in the trust document.

Working to Create Comprehensive Estate Plans for You and Your Loved Ones

Developing a uniquely crafted, comprehensive estate plan that looks to protect the best interests of you and your loved ones is more important than most people realize. At Hyden, Miron & Foster we are here to create an estate plan you can count on. Contact us today.

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