Irrevocable Life Insurance Trust
Are you a high net-worth individual seeking to maximize your inheritance while minimizing taxes paid to the government? If so, consider starting an Irrevocable Life Insurance Trust.
What Does an Irrevocable Life Insurance (ILIT) Trust Do?
ILITs serve the following function for estate planning and asset protection:
- Removes life insurance proceeds from your taxable estate
- Provides tax-free liquidity to your estate
- Preserves real estate, family business or other liquid assets
- Maximizes inheritance while minimizing taxes paid to the government
An ILIT is a smart choice for high net worth individuals who want to purchase and maintain one or more life insurance policies. Since the primary purpose of an ILIT is estate tax reduction, it’s important that you consider to what extent you’re exposed to the estate tax.
Cash held inside of the ILIT and within the policy owned by the ILIT is beyond the reach of potential lawsuit creditors because the assets that it owns are not within the legal ownership of the insured or the grantor. Such assets belong exclusively to the ILIT, which is considered a separate 'person' under the law. These assets are administered by a carefully selected trustee who operates under a strict standard of care, owing a fiduciary duty to the beneficiaries of the ILIT.
Advantages of Irrevocable Life Insurance Trusts
- Under existing tax law and regulations, a policy owned by an ILIT pays out its death benefit at the demise of the insured payable to the ILIT 100% free of income tax AND federal estate taxes.
- Policies issued after the formation of the ILIT automatically escape inclusion in the taxable estate. Policies pre-dating the formation of the ILIT are subject to a "three-year rule" that include the insurance death benefit in the taxable estate if death occurs within the first three years after the trust's formation.
- The "three-year rule" can be circumvented simply by working with an insurance carrier to re-issue the policy. This is referred to as a 1035 exchange and is done so the new policy post-dates the date of the ILIT.