Amongst the numerous estate planning tools, an irreversible life insurance trust, or ILIT, offers various advantages with few downsides. The primary objective of an estate plan is to identify how you want your properties to be dispersed upon your death; nevertheless, there are often essential secondary goals and considerations.
Preventing estate taxes, if you have a large estate, is typically one of those considerations as are avoiding probate and defense from financial institution claims. An ILIT can typically help you achieve both of those goals.
An ILIT, as the name suggests, is a trust that can not be changed, modified or revoked by you, the grantor. This is among the biggest drawbacks to an ILIT. As soon as you decide to develop and fund an ILIT, you can not change your mind. In addition, as soon as you have actually named recipients to an ILIT, they can not be altered either. Another drawback to an ILIT is that, sometimes, a pre-existing life insurance coverage policy does not certify for the protection from estate taxes offered brand-new policies. Consult your estate planning lawyer concerning current laws.
The principal advantage to an ILIT is that the proceeds from a life insurance coverage policy acquired by or transferred to the ILIT are not subject to estate taxes. An ILIT runs much the very same as any other trust. You, as the grantor, designate a trustee to administer the trust and carry out the needed trust files. The trust then ends up being a separate legal entity for tax functions. A preliminary gift of funds from you is then used to buy the life insurance coverage policy. Beneficiaries are named according to the trust terms. Each year, you gift additional amounts of cash to the trust. As long as your gift is less than the present annual gift tax exclusion,, your gift to the trust is also exempt to taxation or lowering your gift tax or estate tax exclusions. The funds from your yearly gift are then utilized to spend for the administration of the trust and premiums for the life insurance policy. Upon your death, the policy advantages are then paid to the recipients. Because the policy was not owned by you, the proceeds are not subject to estate taxes.
Other advantages of an ILIT are the avoidance of probate and protection from lenders. Again, since the policy is not lawfully owned by you the proceeds are not thought about to be part of your estate. As such, the earnings are not held up in probate and can normally be immediately paid out to the beneficiaries. Nevertheless, since life insurance generally has a designated beneficiary, it normally passes outside probate. Throughout your lifetime value might develop up in the policy, however a policy in an ILIT can’t be reached by creditors.