Life insurance is not a complicated proposition. You pay premiums for the peace of mind of knowing that your loved ones will be provided for in the event you pass away. Things can get riskier, however, if large lump sum death benefits are paid directly to your desired beneficiaries. 

First, estate taxes may apply. Depending on the value of your estate and where you live, estate taxes can reach up to 30 to 45 percent. What is more, inherited life insurance proceeds can be accessible to creditors, and there is always a risk of putting significant amounts of money into the hands of minors or financially irresponsible adults. For many people, an Irrevocable Life Insurance Trust (or ILIT) provides a solution.

An Irrevocable Life Insurance Trust is a type of living trust that owns the life insurance policy and becomes the beneficiary to the death benefits after the policy holder, or grantor, dies. The grantor’s desired heirs are the beneficiaries of the trust, not the policy. This creates several immediate benefits that include, but are not limited to, the following: since estate taxes apply only to property owned by the deceased, life insurance proceeds are not part of the taxable estate and, because the life insurance proceeds are held in trust, the grantor can predetermine how they are used and distributed after he or she passes away.

Holding life insurance assets in trust also prevents creditors from gaining access to death benefits, whether they are pursuing debts from the grantor or the beneficiaries. Proceeds are accessible to creditors, however, when they leave the trust. Since an ILIT is not technically part of the grantor’s estate, it can be crafted to use trust assets to pay any estate taxes, debts or expenses, but many, if not all, of these features rely on a competent trustee. 

A trustee is a key aspect of an ILIT who should be handpicked by the grantor for the purpose of overseeing the trust and administering trust assets. Specific responsibilities include:

  • Opening and maintaining a trust checking account
  • Applying for and purchasing life insurance policies
  • Accepting funds from the grantor
  • Sending “crummey” withdrawal notices
  • Paying premiums to the insurance company
  • Making investment decisions
  • Filing tax returns
  • Claiming insurance proceeds at your death
  • Making distributions of trust assets according to trust terms

We know this article may raise more questions than it answers on this type of estate planning. If you or someone you know would like more information about an Irrevocable Life Insurance Trust, do not wait to contact our law firm today, or at any time in the future.