Irrevocable Life Insurance Trust
An Irrevocable Life Insurance Trust (many times called an “ILIT”) is a vehicle to hold your life insurance policy and then, after your death, it distributes the life insurance proceeds according to the trust provisions. Here are a few important facts about an ILIT.
Irrevocable: an ILIT is “irrevocable” meaning you cannot change it at any time after it is created.
Assets: You will put your life insurance policy into the trust. The trust will be the beneficiary of the policy. The trust will pay the premiums on the policy. So, you will be funding the trust to pay the insurance premiums.
Trustee: You and any trust beneficiaries cannot be trustee(s) of the trust. You will appoint a trustee(s) and successor trustee(s). This means that you and the beneficiaries of the trust will not make any decisions about the trust (other than whether you will fund it to pay the insurance premiums). However, the trustee must follow the trust provisions, which set forth how and when you want the trust assets to be distributed.
Estate Taxes: If you use an existing policy to fund the ILIT (rather than the ILIT purchasing the policy), the policy’s proceeds will be included in your estate for tax purposes if you die before the 3-year anniversary of the policy’s transfer into the ILIT. But, the good news is that there will not be any estate taxes unless your estate exceeds $5.45 million.
Income Taxes: Prior to your death, the trust will not have any income. When you die, the proceeds from the policy are not taxable. But, if the proceeds earn income, the trust will be subject to federal and state income taxes and must file its own income tax returns.
Purpose: For most people (with estates under $5.45 million), the main reason for having an ILIT is to: (a) insure that the surviving spouse and children are financially provided for; (b) protect the surviving spouse from pressure by a spouse (from remarriage) to participate in the assets; and (c) protect the assets from beneficiary creditors. Those with estates over $5.45 million also use the trust to reduce federal estate taxes and to use the insurance proceeds to pay estate taxes.Developing Your ILIT:
In your ILIT, you will have the opportunity to address the following (which are almost identical to the Living Trust):
Trustee(s): you will name trustee(s) and successor trustee(s) who will execute the trust’s provisions after the death of the insured person.
Distributions: you will specify how the assets will be distributed after the death of the insured person. Let’s look at the options in more detail below.
Who/Beneficiaries: Who will the distributions go to? Those that will receive distributions are called Beneficiaries. They can include:
- Family – spouse, children, parents, siblings, etc.
- Charity – church, ministry, Red Cross, etc.
- Other – whoever or whatever you would like.
How: How will your assets be distributed? You can distribute specific amounts, percentages or “shares”. Shares can be calculated various ways – the most common are:
- Per Stripes: Shares are distributed by the number of children you have. For example, if you have 4 living children, the amount each child would get is 25%. If a child is deceased without children, then that child would get nothing – but if that child has living children, then those grandchildren would get equal shares of their parent’s share.
- Per Capita: Shares are distributed by the number of living descendants. For example, if you had 3 children – one is deceased with 2 children and the others are unmarried (so there are 4 living descendants) – each child would get 1/4th and the grandchildren would each get 1/4th.
- By Representation: Is a hybrid between "per capita" and "per stirpes". If all the living descendants are the same generation (e.g, all are children or all are grandchildren), then the shares are calculated using per capita. But, if the closest living descendants of each child are different generations, then the shares are calculated using per stirpes.
When: When will distributions be made? You can distribute the assets at any time. Many times distributions to children will be made three times at 25, 35 and 45 years old (to help the children learn from any mistakes).
What: What will be distributed? You can identify specific assets that will go to specific beneficiaries.
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