Why would you need an Irrevocable Life Insurance Trust?
If you own a life insurance policy in your name at the time of your death, the proceeds from that life insurance policy are included in your taxable estate. An Irrevocable Life Insurance Trust is used to keep the payment of life insurance proceeds out of your taxable estate. This can be used to pay estate tax to the extent that the decedent does not have liquid assets sufficient to cover estate taxes upon death (such as a privately held business or real estate).
Is it irrevocable or revocable?
As the name suggests, an Irrevocable Life Insurance Trust is irrevocable, meaning it cannot be changed once created.
Is a separate tax identification required?
The ILIT does not require a separate Tax Identification Number, but in some cases, it will have its own Tax Identification Number. Upon death, a social security number can no longer be used.
Can you be your own Trustee?
No, to keep the ILIT outside of your taxable estate, it is best to use a third party as the Trustee of this Trust.
Is a gift tax return required?
It depends. Generally, the payment of annual premiums will be less than the annual exclusion amount; thus, no gift tax return is required. A gift tax return would be required if there is a contribution beyond the annual exclusion amount.
Is this subject to estate tax upon my death?
Generally, no. An ILIT, if created and managed properly, will be outside your taxable estate.
Is there creditor protection?
The creditor of the person who created an ILIT cannot reach the assets within the ILIT.
What assets can be placed in this type of Trust?
Life insurance is typically the only asset owned by the ILIT.
How does it work?
The ILIT is set up to acquire life insurance from the life insurance company. Once purchased, to keep the ILIT going, you typically must feed it with annual gifts to pay premiums. When a contribution is made to the ILIT, there must be the ability to make discretionary distributions of income and principal to the trust beneficiaries. Each year, after the gift is made to the ILIT, the beneficiaries could take the contribution (or waive it) – this is also known as a Crummey Power.
If the beneficiary waives the contribution, then the gift is used to pay the life insurance premiums. Sometimes, a GRAT can be used as a combined planning device to pay for insurance.
To keep the ILIT out of your taxable estate, you want to ensure there is no requirement to pay estate taxes on a person’s estate. Instead, the ILIT could lend funds to the estate to pay the estate tax or purchase assets from the estate. The ILIT is typically a multi-generational trust and is GST-exempt to provide for future generations.
Contact a Trust Attorney today to schedule a consultation and learn more about how we can help you with your estate planning needs.