Irrevocable Life Insurance Trusts (ILIT)

July 27, 2020
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Life insurance is a common source of estate liquidity because it provides a large amount of cash at the decedent’s death. So, what exactly is an Irrevocable Life Insurance Trust, commonly referred to as an ILIT, and how does it work?

This estate planning technique combines the benefits of trusts and life insurance and when properly established the ILIT will remove any life insurance proceeds from the decedent’s gross estate therefore making them free of estate taxes.  There are typically three types of parties associated with ILITs – the grantor (the party who typically creates and funds or gifts the trust), the trustee (the party responsible for managing the ILIT and any distributions of life insurance proceeds), and the beneficiary (the party who ultimately receives distributions from the trust after the insured’s death).

How does it work?  Once the ILIT is established, the trustee purchases a life insurance policy, with the grantor as the insured, and the trust as the owner and beneficiary of the policy.  Upon the insured’s death, proceeds from the life insurance policy can be used to provide immediate liquidity for paying estate taxes and other expenses and then ultimately distribute funds to the beneficiary of the ILIT as instructed within the trust document.

 Let’s summarize the top advantages to establishing an ILIT:

  1. The avoidance of probate on the trust assets.
  2. The flexibility in distribution of the assets to the trust beneficiaries.
    1. For example, a trustee may determine to distribute assets based on a beneficiary hitting a certain milestone, like attending college, or buying their first home.
  3. The removal of the life insurance death proceeds from the decedent or insured’s gross estate.

 

Hopefully, this provided a quick overview of some of the great benefits of establishing an ILIT, however, everyone’s wealth plan is unique and there are several other details that should be considered prior to proceeding with this planning tool.  Please consult with your trusted wealth management team here at Troxell Financial for more information.