Amongst the many estate planning tools, an irrevocable life insurance trust, or ILIT, offers many advantages with couple of drawbacks. The main objective of an estate plan is to figure out how you wish your possessions to be distributed upon your death; nevertheless, there are often essential secondary objectives and factors to consider.
Preventing estate taxes, if you have a substantial estate, is often one of those considerations as are preventing probate and security from creditor claims. An ILIT can frequently help you accomplish both of those goals.
An ILIT, as the name indicates, is a trust that can not be modified, customized or withdrawed by you, the grantor. This is one of the biggest downsides to an ILIT. When you decide to produce and money an ILIT, you can not change your mind. In addition, once you have named beneficiaries to an ILIT, they can not be changed either. Another disadvantage to an ILIT is that, in some cases, a pre-existing life insurance coverage policy does not receive the protection from estate taxes used brand-new policies. Consult your estate planning attorney regarding current laws.
The principal advantage to an ILIT is that the proceeds from a life insurance coverage policy bought by or transferred to the ILIT are not subject to estate taxes. An ILIT operates much the same as any other trust. You, as the grantor, designate a trustee to administer the trust and carry out the required trust documents. The trust then becomes a separate legal entity for tax functions. An initial gift of funds from you is then utilized to buy the life insurance policy. Recipients are named according to the trust terms. Each year, you gift additional sums of loan to the trust. As long as your gift is less than the current yearly gift tax exemption,, your gift to the trust is likewise exempt to taxation or decreasing your gift tax or estate tax exclusions. The funds from your yearly gift are then used to pay for the administration of the trust and premiums for the life insurance coverage policy. Upon your death, the policy benefits are then paid out to the beneficiaries. Since the policy was not owned by you, the proceeds are not subject to estate taxes.
Other advantages of an ILIT are the avoidance of probate and protection from financial institutions. Once again, due to the fact that the policy is not lawfully owned by you the proceeds are ruled out to be part of your estate. As such, the profits are not held up in probate and can generally be immediately paid out to the beneficiaries. Nevertheless, because life insurance normally has actually a designated recipient, it normally passes outdoors probate. During your lifetime value might construct up in the policy, however a policy in an ILIT can’t be reached by financial institutions.