Irrevocable Life Insurance Trusts

Life Insurance

The largest part of your estate
should be the most protected

You may have a valuable life insurance policy, but you worry the proceeds will not be used wisely. Or, you believe the policy payout value will affect your estate taxes. If either of these is true for you, an irrevocable life insurance trust may be something to consider. The life insurance trust is the owner of and names the beneficiary of a life insurance policy. The trustee of the trust invests the proceeds from the policy when it pays out after death, and, manages the money for one or more beneficiaries. There are two key benefits from using a life insurance trust. First, you have greater assurance that the funds will be used in a manner that you see fit. Beneficiaries do not always use the money wisely but if the trustee of a trust is in charge there is a greater chance that the money will be better managed. Second, if the trust is set up and managed properly, the assets of the trust will not be part of your estate when estate taxes are calculated.

Senior Woman Worried Life Insurance Trust

“I want to lower my estate taxes and make sure the money doesn’t go to waste.”

What is an irrevocable life insurance trust

An life insurance trust is usually irrevocable, or unchangeable, and it contains legal provisions that allow it to buy insurance and other investment vehicles. Any life insurance policy that insures your life is property and it has value. If you own it, creditors can seize it. And, the IRS includes it in your taxable estate after you die because you have a right to decide who the receives the death benefit, and that type of control denotes ownership for tax policy purposes.
The explanation above does not apply if an irrevocable life insurance trust (ILIT) owns the life insurance policy. In that situation, the policy coverage is there for your beneficiaries but the property – the insurance policy – does not belong to you. The irrevocable trust is considered a separate, independent legal entity that is now the owner. If you do not own the policy, creditors cannot reach the value of the policy making it very good protection against creditors and the policy is not part of your estate for tax purposes.
And equally as important is the way the ILIT can pay out to your beneficiaries. It can hold and manage the funds, or slowly distribute them. If your beneficiaries are not old enough to manage a large lump-sum distribution of money or they are not savvy enough to manage it well, placing a trustee in charge of the cash is a wonderful feature.

* heirs may not have to pay estate or inheritance taxes on the life insurance death benefits
* death benefit funds can be distributed in ways that aid spendthrift beneficiaries

How you can create a life insurance trust

1. Meet with an attorney to draft the ILIT
2. Meet with an insurance agent to buy the policy
3. The trustee buys the policy

You should consult with an attorney and a personal life insurance agent or broker. The attorney will help you draft the ILIT according to your needs and the insurance agent will help you with the policy terms and coverage. Ideally, the ILIT will be created first. The trustee of the trust should apply for and buy a new policy likely using a gift of cash from you, the insured. There are a few reasons why the ILIT should be created before the policy is acquired. First, if you transfer an existing policy into the trust but you die within three years the policy will be included in your estate. Second, if you transfer an existing policy into the trust the transfer constitutes a gift subject to the federal gift tax.

How much life insurance coverage do you need?

The amount of coverage you need depends on your debts and circumstances. A life insurance agent or broker would be glad to meet with you to discuss these issues, or, you can use an online calculator to obtain some estimates.
You should focus on how much money will be needed immediately after your death to settle final expenses, uncovered medical bills, funeral costs, and more. Additionally, try to determine how much “future income” would be needed to sustain your household. Factor in your family’s expenses on a monthly basis and then extrapolate out for a number of years.


households with life insurance coverage

Estate planning guidance
Lawyer Jeff Skrysak

Attorney Jeff Skrysak is available to meet with you – initial consultations are free.

Setting up your life insurance trust takes time and effort. We can help guide you through the process and introduce you to agents in the area, or, work with your preferred agent.

1. Insurance statistic sourced from–nearly-5-million-more-us-households-have-life-insurance-coverage-300335782.html