An irrevocable life insurance trust (ILIT) is an essential estate planning tool that allows individuals to manage life insurance policies in a way that minimizes tax burdens for their beneficiaries. This advanced strategy not only removes the life insurance proceeds from the grantor’s taxable estate but also ensures a smooth transfer of wealth. In this article, we’ll explore how an irrevocable life insurance trust works, its benefits, and why it’s a popular choice for reducing estate and generation-skipping transfer (GST) taxes.
How an Irrevocable Life Insurance Trust Works
An irrevocable life insurance trust is a legal entity created to hold a life insurance policy outside the estate of the grantor. Once the trust is established, the policy is transferred into the trust, and the grantor can no longer make changes to the terms or beneficiaries of the trust. This ensures that the proceeds from the policy are not included in the taxable estate upon death.
Key Benefits of an Irrevocable Life Insurance Trust
The primary benefit of forming an irrevocable life insurance trust is its ability to remove life insurance proceeds from the taxable estate. By doing so, the trust helps reduce estate taxes, especially for individuals with larger estates. Additionally, the trust can prevent beneficiaries from facing tax liabilities like estate and GST taxes on the proceeds.
Funding an Irrevocable Life Insurance Trust
A grantor can fund an irrevocable life insurance trust through annual gifts or a lump-sum contribution. These gifts are often below the annual gift exclusion limit, meaning no gift tax implications. The trust uses these funds to pay the policy’s premiums, ensuring that the trust remains solvent and can distribute the life insurance proceeds to beneficiaries after the grantor’s death.
Get Professional Advice on Irrevocable Life Insurance Trusts
Creating an irrevocable life insurance trust can be an excellent way to protect your assets and ensure a smooth transfer of wealth to your beneficiaries. Consult an experienced estate planning attorney to learn how this strategy can benefit your specific situation. Visit Hudack Law Estate Planning Attorney to learn more about our services. We’re proud to serve California, Utah, and Arizona. Call our Toll-Free line at (877) 314-4309 to schedule a consultation with one of our experienced attorneys.