An irrevocable life insurance trust (ILIT) holds insurance money that you invest for the people you want to take care of. Ordinarily, the face value of a life insurance policy is included in the estate tax calculation of the owner of the policy. This can cause a significant estate tax liability if you have a taxable estate. The ILIT uses your annual gift tax exclusion to:

• reduce the size of your estate, and reduce or eliminate estate taxes;
• protect the money you invest in your life insurance policy from creditors;
• eliminate the need for Probate, since the proceeds of the ILIT are transferred privately by the insurance company, to the people you designate;
• allow you to control who receives the proceeds from your life insurance policy.

Additional goals of an ILIT can include:

• protecting the eligibility of a family member who receives government benefits;
• scheduling distributions from the ILIT for a beneficiary who needs money for college tuition, graduation, or down payment for a home;
• flexibility that allows for distributions of money if a beneficiary starts a business, gets married, has a child or for other special needs that you designate.

Anyone can establish an ILIT. You decide on what is important to you, and we will plan the ILIT to fit your specific goals and intentions. Here are the steps to take:

1. Consider the people you want to benefit from your ILIT, and chose initial and successor trustees
2. Get a medical examination to confirm that you can actually be insured under the insurance policy you have selected. Don't sign anything, except as a person who is to be insured. Don't sign as an owner of the insurance or as the applicant for the insurance policy;
3. We'll draft the trust;
4. You and your trustee sign the insurance trust;
5. Your trustee applies for the life insurance policy and signs an application as owner of the insurance policy;
6. The life insurance application should not be filed until you make an initial gift to the ILIT to cover the premium that is held in the ILIT's checking account. Your trustee notifies your beneficiaries that a gift is being made to the ILIT and they have rights of withdrawal (known as Crummey powers) ;
7. After the time period for withdrawals has lapsed, payment of the premium can be sent to the insurance company.

For a blended family, the ILIT can provide a flexible way to prevent conflict when a person is survived by children from two marriages.

Example: Dr. Roger Cardigan and Eileen Cardigan have been married for thirteen years, and they have three young children. Roger also has two older children from a previous marriage.

Although everyone gets along well now, Roger is concerned about being fair to his older children. He wants to remember them with a meaningful inheritance, while also leaving as much income as possible for Eileen and his three younger children. These goals present a planning challenge.

Roger considered using the QTIP trust that Mr. Quinones had selected. The QTIP would allow him to leave income for Eileen for her life, and then have the remaining assets go to his older children upon Eileen's death. But, there are serious drawbacks.

Roger wants to leave assets outright to Eileen that are not tied up in a trust. He's also worried that there won't be enough assets to go around. If Roger's assets are exhausted by Eileen during her life, his older children from the prior marriage would get nothing.

Even if there are enough assets left for the older children, there would be a timing problem with the QTIP Trust. Roger does not want his older children to have to wait until Eileen's death to receive their inheritance. That would be an invitation to resentment.

The solution for Roger is life insurance that is owned by an irrevocable life insurance trust. The ILIT allows Roger to balance the needs of Eileen, and his two older children.

Roger would use some of his current income to pay the premiums on life insurance that will be owned by the trust. When Roger dies, the ILIT will:

1. provide an immediate death benefit to his older children from his first marriage. (they won't have to wait to receive their inheritance)
2. help with plans to avoid Federal and Massachusetts estate tax at Roger's death
3. help eliminate friction between them and their stepmother Eileen (the older children won't be able to complain about how Eileen is spending or investing the money needed for her lifetime support).
4. make all of Roger's other assets available to support Eileen and the younger children.

Sign up Here for our Free Estate Planning Email Updates

For Email Marketing you can trust