Amongst the many estate planning tools, an irrevocable life insurance coverage trust, or ILIT, offers numerous benefits with few downsides. The primary objective of an estate plan is to identify how you wish your properties to be dispersed upon your death; nevertheless, there are often crucial secondary goals and factors to consider.
Avoiding estate taxes, if you have a large estate, is frequently among those factors to consider as are preventing probate and security from financial institution claims. An ILIT can often help you achieve both of those goals.
An ILIT, as the name suggests, is a trust that can not be amended, modified or withdrawed by you, the grantor. This is one of the greatest disadvantages to an ILIT. Once you make the decision to develop and money an ILIT, you can not change your mind. In addition, once you have called beneficiaries to an ILIT, they can not be changed either. Another drawback to an ILIT is that, in many cases, a pre-existing life insurance policy does not get approved for the security from estate taxes provided brand-new policies. Contact your estate planning attorney concerning present laws.
The principal benefit to an ILIT is that the profits from a life insurance policy acquired by or moved to the ILIT are exempt to estate taxes. An ILIT runs much the same as any other trust. You, as the grantor, select a trustee to administer the trust and execute the needed trust files. The trust then ends up being a different legal entity for tax purposes. A preliminary gift of funds from you is then utilized to purchase the life insurance policy. Recipients are called according to the trust terms. Each year, you gift extra sums of loan to the trust. As long as your gift is less than the existing yearly gift tax exclusion,, your gift to the trust is likewise exempt to taxation or minimizing your gift tax or estate tax exemptions. The funds from your annual gift are then used to spend for the administration of the trust and premiums for the life insurance policy. Upon your death, the policy benefits are then paid out to the recipients. Since the policy was not owned by you, the profits are not subject to estate taxes.
Other advantages of an ILIT are the avoidance of probate and protection from creditors. Once again, due to the fact that the policy is not lawfully owned by you the profits are not considered to be part of your estate. As such, the proceeds are not held up in probate and can generally be right away paid to the beneficiaries. Due to the fact that life insurance coverage generally has actually a designated beneficiary, it generally passes outside probate. During your life time worth might develop in the policy, however a policy in an ILIT can’t be reached by creditors.