Irrevocable Life Insurance Trust (ILIT): What is It and What Are the Benefits?
When preparing an estate plan, many Floridians wonder whether it makes sense to create an Irrevocable Life Insurance Trust (ILIT). You need to understand what an ILIT is in order to know whether it is worth creating one.
While an ILIT can be a critical trust planning tool, creating an Irrevocable Life Insurance Trust may not fit your particular estate planning needs.
What is an Irrevocable Life Insurance Trust (ILIT)?
Generally, Florida recognizes two types of trusts:
Basically, a trust is a transfer of property and assets involving three parties:
- The grantor, the individual who creates the trust;
- The trustee, a person or entity that succeeds the grantor after their death or incapacitation (the trustee receives and manages the property); and
- Beneficiaries (what and when the beneficiaries receive property transferred into a trust depends on the terms of the trust).
The biggest difference between a revocable and irrevocable trust is that the former may be canceled or altered by the grantor. An irrevocable trust cannot be changed or terminated until the purpose of the trust has been complete.
As the name of an Irrevocable Life Insurance Trust suggests, this trust must be irrevocable and is established to have a life insurance policy.
What Are the Benefits of Creating an Irrevocable Life Insurance Trust?
So why would you need to create an ILIT? Wouldn’t it be easier to purchase a life insurance policy and simply name a beneficiary who would receive payment directly? Creating an ILIT and transferring the life insurance policy to the trust carries potential benefits.
Many Floridians choose to create an ILIT for (1) estate tax management purposes and (2) the ability to control the proceeds of life insurance.
Estate Tax Management
Depending on the “size” of your life insurance policy, it may contribute to increasing the value of your estate and result in the payment of significant estate taxes. Life insurance policies are treated as part of the estate for tax purposes.
However, when an ILIT owns the life insurance policy, it is no longer considered the deceased’s property and cannot qualify as a part of the estate. For this reason, the life insurance policy owned by an ILIT cannot impact how much your estate is worth.
The Ability to Control the Proceeds of Life Insurance
If you purchase a life insurance policy and appoint a beneficiary, the beneficiary will receive all the proceeds upon your death. For many, this is the appropriate outcome. However, others would prefer at least some degree of control over the payment of the proceeds.
If you wish to prevent the full proceeds of the policy from being paid out all at once, creating an ILIT gives you several options. Depending on the terms of your ILIT, you may authorize payment of certain types of expenses, payment of only the interest, dispensing the funds in installments, or choose other options to control or limit the distribution of the proceeds to your beneficiaries.
An Irrevocable Life Insurance Trust can become a helpful tax planning and estate planning tool that helps you manage estate taxes and control the distribution of the proceeds of life insurance. However, an ILIT may not be equally useful for everyone, which is why you should talk with a St. Petersburg trust planning attorney at our law firm, Legacy Protection Lawyers, LLP. Schedule a case evaluation by calling at 727-471-5868.