An irrevocable life insurance trust (ILIT) is a type of trust specifically designed to hold and manage a life insurance policy. Unlike revocable trusts or wills, which you can change or revoke at any time, an ILIT is set in stone once it’s created.
When you set up an ILIT, you transfer ownership of your life insurance policy to the trust. The trust becomes both the owner and the beneficiary of the policy. You will then name a trustee to manage the trust and designate beneficiaries who will receive the insurance proceeds.
When you pass away, the insurance company pays the death benefit to the trust. The trustee then distributes the proceeds to the beneficiaries according to your instructions.
It can help you save on taxes and protect your assets
One of the primary benefits of an ILIT is its ability to reduce estate taxes. In California, while there’s no state estate tax, federal estate taxes can still be a concern for larger estates. The Internal Revenue Service (IRS) does not consider life insurance proceeds held in an ILIT as federally taxable estate, so it can potentially reduce your overall estate tax burden.
Since the trust also owns the policy, it can protect the death benefit from creditors of both you and your beneficiaries. This can help ensure that your intended beneficiaries receive the full benefit of the policy.
It gives you more control over where the insurance goes
Another advantage is that you can be specific about the distribution of the proceeds, depending on what you write in the trust. This can be particularly useful if you’re providing for minor children or beneficiaries who might need help managing large sums of money.
For example, you could instruct the trustee to provide regular payments to beneficiaries over time. You may also use the funds for specific purposes like education or healthcare or hold the funds in trust until beneficiaries reach a certain age.
Know if this is the right trust for your situation
An ILIT can be a powerful tool in your estate plan. However, because of its complex nature and irrevocable status, it’s important to talk to an attorney before setting one up. They can help you decide whether an ILIT is the right choice for you.