Life insurance policy death benefits pass to a decedent’s spouse tax-free, but when the spouse passes, the benefits are included in his or her taxable estate. These benefits are often high in value and push the amount of an individual’s total estate above the allowable lifetime gift and estate tax exclusion. Fortunately, there exists a handy device called the irrevocable life insurance trust, or ILIT, which can help protect life insurance benefits from the estate tax. Life insurance benefits in an ILIT pass tax-free even after the beneficiary spouse dies.
ILITs function like all other trusts, except that they are funded specifically by life insurance policy benefits. A trustee is appointed to supervise and distribute the assets according to the grantor’s wishes rather than following the standard one lump-sum distribution of life insurance benefits to beneficiaries. Many people prefer to distribute assets gradually to minor children or beneficiaries who have trouble managing money. Additionally, the trust, not the grantor, owns the assets, which is how the money in an ILIT is able to circumvent the estate tax. Benefits in an ILIT are also protected against the grantor’s creditors and the beneficiaries’ creditors, so long as the proceeds remain in the trust after the grantor’s death.
An ILIT cannot be rescinded, amended, or modified after its creation and its beneficiaries cannot be changed. While this prospect may be daunting, experienced estate-planning attorneys at Waldron & Schneider are here to assist you in setting up an ILIT suited for your financial plans.
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