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What Can an Irrevocable Life Insurance Trust Do in an Estate Plan?

MP900390083 (1)Families with young beneficiaries or significant assets might want to consider the use of an Irrevocable Life Insurance Trust (ILIT) to provide more control over a life insurance policy than a typical last will and testament. The peace of mind is worth the investment. However, it’s not for everyone.

Before investing in an irrevocable life insurance trust, understand that you won’t be able to make any changes. Therefore, the word used is “irrevocable.” There are some advantages to this type of trust. However, many people opt for a revocable trust instead, because they prefer knowing that they can make changes, if they wish.’s recent article, “How an Irrevocable Life Insurance Trust (ILIT) Works,” explains that a revocable trust lets the grantor change or even end the trust. An irrevocable trust permits no modifications from the trust creator once it’s been drafted. The only ones allowed to make and approve changes are the beneficiaries. However, these trusts have some benefits despite their inflexibility.

With an irrevocable trust, death benefits will not be part of your gross estate, so they aren’t subject to state and federal estate taxes. However, while your estate is exempt from estate taxes, they may be subject to taxes in your beneficiaries’ estate, which can shift your tax burden onto them.

An irrevocable trust allows restrictions to be put in place for minors who may not be responsible or equipped to handle large amounts of money. You can set up terms, so beneficiaries have to attain a certain age to gain assets or accounts.

An irrevocable trust can also protect you and your family from creditors.

The IRS says that life insurance payouts are usually not included in your gross assets, but there are exceptions. If you’ve earned interest on a life insurance payout, any interest you received is taxable. In addition, if a life insurance policy was transferred to you by another individual for money, only the sum you paid is excluded from taxes.

There are some drawbacks to an ILIT. Some of the tax benefits of an ILIT only work in if you live three or more years after transferring your own life insurance policy to the trust. Otherwise, the IRS will include life insurance proceeds in your estate for estate tax purposes. The ILIT can buy the policy and avoid that rule, but you’ll have to fund the trust to pay premiums.

Giving the trust money for that policy may also make you subject to gift taxes. However, if you send beneficiaries a letter after each transfer telling them that they don’t have immediate access to the money, gift taxes won’t apply.

The biggest downside to an ILIT is that you can’t change it once it’s established. You give up control of assets and can’t dissolve the trust unless you simply stop making payment for premiums. Although the trust rids you of certain taxes, your beneficiaries may take on a big tax burden, once they get the assets in your estate.

Even if there is no life insurance policy involved in trusts, these important estate planning strategies can become complex, especially with regard to tax planning. An estate planning attorney licensed to practice law in your state will be able to review your situation to see what kind of trusts would work best for you.

Reference: (July 19, 2019) “How an Irrevocable Life Insurance Trust (ILIT) Works”