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A Guide to Irrevocable Life Insurance Trusts

In this guide, we break down what an Irrevocable Life Insurance Trust is and if it’s the right choice for you.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Life insurance policies are a well-known measure of creating benefits for your loved ones. In exchange for payments by, the insurance company guarantees that your beneficiaries will receive a payment upon your passing. Have you ever considered further protecting your life insurance policy by setting up an irrevocable life insurance trust (ILIT)? It’s well-worth taking a peek into the benefits of placing your insurance policy into a trust. Keep reading to find out if an ILIT trust is the right fit for you.

What is an Irrevocable Life Insurance Trust (ILIT)?

An irrevocable life insurance trust, or ILIT for short, is a trust that owns a life insurance policy as its main asset. Because it is irrevocable, this type of trust cannot be revoked or changed once it has been created. (check out our article to learn more about the difference between irrevocable and revocable trusts.)

The grantor (the person who sets up the trust) will typically create an ILIT during their lifetime. Once they take out a life insurance policy, they will transfer it under ownership of the trust. After doing so, they can no longer change the term of the trust, nor can they transfer ownership of the life insurance policy back under their name. 

How Does an Irrevocable Life Insurance Trust Work?

Three main parties are involved in an ILIT trust: the grantor, the trustee, and beneficiaries. The grantor is the individual who sets up and funds the trust with a life insurance policy. In some cases, they may choose to own a “second to die” life insurance policy instead. This policy ensures two lives instead of just one, such as for a married couple, and only pays out a benefit once both individuals have passed away.

Once the grantor transfers their life insurance policy into the trust, they are giving up control and can no longer make any changes. Here, the appointed trustee is responsible for managing the ILIT along with the assets owned by it. One of their main responsibilities is to ensure that premium payments are made to the policy through the trust account. 

When the life insurance policy kicks in, the trustee must then make sure that benefits are properly distributed to the beneficiaries of the trust. These individuals are often direct family members of the grantor, such as children or grandchildren.

What Are the Benefits of an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust offers several benefits that are hard to ignore. First and foremost, an ILIT offers asset protection. For instance, creditors cannot come after death benefits that are protected with a trust.

Many individuals also use trusts as a strategy to minimize taxes related to estate planning. For example, placing life insurance in an ILIT can help reduce the overall size of the estate, helping reduce estate taxes. It can also help the estate avoid gift tax consequences. 

Last but not least, an ILIT allows for a grantor to control how the life insurance benefit is distributed, once it kicks in. If they feel worried about beneficiaries receiving a lump sum, they can instead arrange for the trust to release smaller, timed installments instead. This can also protect the beneficiary so that there are no conflicts that would jeopardize government benefits they may already be receiving.

  • Asset protection

  • Reduce taxable estate

  • Avoid gift tax consequences

  • Greater control

  • Protect government benefits

What is the Downside of an Irrevocable Life Insurance Trust?

There are a few downsides associated with using an irrevocable life insurance trust. It’s always important to take a close look at advantages and disadvantages before making a commitment. This is especially true in the case of an ILIT, because they are irrevocable in nature. Once you set up and fund your ILIT, you can no longer make any changes. This means that you cannot change your beneficiary or beneficiaries, even if you experience divorce in the family or a falling out. If you feel uncertain about the future, or prefer to retain flexibility, it may be best not to add an irrevocable trust to your estate plan. 

Why Use an ILIT 

You might opt to use an ILIT over other types of trusts if you have concerns regarding the size of your taxable estate, and you have the desire to exert greater control over how your life insurance policy is distributed. 

By placing your life insurance policy under ownership of an irrevocable trust, you are reducing the size of your taxable estate. This is because assets placed into trusts are not treated as individual taxable assets. Thus, if you are near the threshold for estate taxes, you may consider moving your life insurance benefit into a separate irrevocable life insurance trust.

Further, any type of trust offers grantors great control over asset management and distribution. If for some reason you do not want your beneficiaries receiving a lump sum payout of your life insurance, you can include instructions for the trustee on how you would like for them to distribute any benefits. For example, you might designate that life insurance benefits be paid to your beneficiaries in small installments, or once they reach a certain age. 

Common Questions About Irrevocable Life Insurance Trusts

Because irrevocable life insurance trusts are so particular in nature, you’re sure to have some additional questions. We went ahead and answered some of the most popular questions about ILIT trusts below.

Who is the Owner of an Irrevocable Life Insurance Trust?

Technically speaking, the owner of an irrevocable life insurance trust is the trust itself. Once the grantor creates and funds a trust, the trust becomes the owner of the assets that are held within. The trustee is charged with the responsibility of managing and distributing the trust assets.

Who Can Serve as an ILIT Trustee? 

Virtually anyone can serve as an ILIT trustee, as long as they are not the individual insured by the life insurance policy. Because the trustee will be responsible for making premium payments, managing the policy, and making distributions to beneficiaries, it is of utmost importance to appoint someone who is trustworthy. If you do not have a personal contact in mind, know that you can also appoint a professional service or independent trustee.

Can an Irrevocable Life Insurance Trust be Terminated?

An irrevocable trust typically cannot be terminated by design. However, it’s possible to obtain a court order to cancel the trust in certain circumstances. For example, the court may approve a termination if the ILIT no longer serves its original purpose due to changes in the family. 

To avoid having to appoint an attorney and go through costly legal procedures, it’s best to put in a lot of care when crafting the trust. This is because irrevocable trusts can be difficult to reverse.

Set Up Your ILIT Today

An irrevocable life insurance trust is a great option if you’re looking for better asset protection and greater control over what will happen with your life insurance benefits. By transferring ownership of your life insurance to an irrevocable trust, not only are you reducing the size of your taxable estate, you’re also protecting that asset from creditors. You also have the option of controlling how much and when your beneficiaries will receive their payments. This is especially helpful if any of your beneficiaries are receiving government benefits and cannot risk jeopardizing them.

If you feel that an ILIT is the right estate planning tool for you, there’s no need to wait to get started! At Trust & Will we offer estate planning products that are designed to benefit every unique situation. This includes a wide range of Trust planning options, and we are here to help you every step of the way.

Is there a question here we didn’t answer? Chat with us today or read more articles in our learn center.

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