What is an Irrevocable Life Insurance Trust [ILIT]

Many people do not realize that the face value of a life insurance policy can increase the size of their taxable estate at death. What this means is that if you have a life insurance policy with a face value of $3 million dollars, and other assets [homes, investments, etc.] valued at $3 million, then at the time of your death, your final estate would be valued at $6 million dollars and expose you to estate tax liability.

At this writing the estate tax exemption amount is at $5.25 million, but as we have seen over the years, this amount has fluctuated and even gone to zero.

Having a life insurance policy in your estate is a benefit to your heirs, but could negatively impact your estate and heirs.

An option to minimize your tax liability and keep your life insurance policy is an Irrevocable Life Insurance Trust ["ILIT"]. An ILIT is a trust wherein the grantor cannot control any assets in the trust or ask for the trust assets to be returned. Nevertheless, the grantor has some indirect control over other parts of the ILIT. The grantor can name the trustee, designate heirs and specify terms for heirs to receive benefits.

How the ILIT works is that the trust applies for a life insurance policy, or an existing life insurance policy is either purchased or transferred to the trust. The life insurance premiums are then paid by the grantor through gifts to the trust.

Since the life insurance policy is not owned by the trust grantor, the death benefits are not a part of the grantor's estate. The size of the grantor's estate is reduced and the grantor's heir have access to a great amount of money that they can use to pay estate taxes.

Please note that if you do transfer an existing life insurance policy to the ILIT, in order for the life insurance policy to not be included in the grantor's estate, the grantor must survive the transfer for three years.

ILIT's are a great estate planning tool. If you have any questions, please feel free to contact us.