Americans have been buying life insurance for decades. One of the reasons for this is that, unlike other financial services, it permits one to lock into a death benefit with a relatively small monthly premium. When the individual dies, the beneficiary gets a lump sum of money very quickly. Typical life insurance, however, really does not benefit the grantor. This can be changed with an irrevocable life insurance trust. Looking for an irrevocable life trust sample?
WHAT IS AN IRREVOCABLE LIFE INSURANCE TRUST?
An irrevocable life insurance trust sample is a trust created that allows for the control of one or more permanent life insurance policies while the insurer is alive. The trust also manages and distributes the proceeds when the insurer dies. With an ILIT, one can have an individual policy and a second-to-die life insurance policy. The second-to-die policy insures the life of the individual but only pays a death benefit after the second death.
Like all trusts, the ILIT also has a grantor, a trustee, and beneficiaries. The grantor usually creates and funds this mechanism. All the assets and gifts made are permanent and managed by a trustee. The trustee will ensure that the beneficiaries receive the distributions when the decedent has died.
HOW DOES THIS TYPE OF TRUST WORK?
An ILIT is funded with one or more life insurance policies during your lifetime. It is irrevocable. The act of a document being irrevocable means that once the ILIT is created, it cannot be altered, changed or revoked. The terms of the agreements are permanently set. You cannot even change the names of the beneficiaries. Ensure you read all the irrevocable life insurance trust forms thoroughly.
If you’re looking for an irrevocable life insurance trust sample to be created, you appoint a trustee who will have the power to make the distributions to the beneficiaries. The insurance funds are usually paid out to one or all beneficiaries at the same time, or you can specify how and when the beneficiaries should receive the funds.
The trustee also has the discretion to make the distribution to the beneficiary when certain milestones are reached, such as completion of college, getting married, having a child, or buying a first home. The ILIT is very useful when there are minors, incapacitated individuals, and others who need financial protection for a long time as they are not able to manage money matters on their own.
WHAT ARE THE BENEFITS OF AN IRREVOCABLE LIFE INSURANCE TRUST (ILIT?)
Once put in place and financed, the trust can serve a wide range of commitments, including the following:
- The ILIT helps avoid the policy death benefit included in the estate for federal tax purposes.
- The ILIT offers the grantor the ability to direct how, when, and for whom the death benefit is used.
- Funding a trust with life insurance may also afford the cash required to cover estate taxes and other expenses after your death. For the survivors, this means they can avoid having to sell any high-value asset or business to pay for these costs.
- In addition, an ILIT allows you to fully leverage the annual gift tax exclusion, which is $16K per donor or beneficiary. One can use these gifts to pay the premiums on the life insurance in the trust.
- It minimizes estate taxes. When life insurance is owned by an ILIT, the proceeds from the death benefit do not become part of the insurer’s gross estate and, hence, are not subject to state and federal estate taxes. Further, the ILIT can also provide cash to help reimburse estate taxes, as well as other expenses and debts, by purchasing assets from the grantor’s estate. Further, any lifetime gift may also help lower the taxable estate by transferring assets into the ILIT.
WHAT ARE THE DOWNSIDES OF AN IRREVOCABLE TRUST?
- Irrevocability. The major downside to the ILIT is that it is irrevocable, meaning once you put your assets in the trust, they no longer belong to you. You cannot even change the names of the beneficiaries or directions on how the money should be distributed. If you even need these assets in the future, you are out of luck because there is no way of getting them back.
- Government benefits. In general, the beneficiary who is getting proceeds from an ILIT, while at the same time receiving government aid, such as social security, disability income, or Medicaid, can lose his benefits. Hence the trustee has to carefully manage the distributions from the trust so that they do not interfere with the beneficiary’s eligibility for any allotted government benefits.
- Asset protection is not complete. In general, the ILIT assets are protected from creditors, but each state has rules and limits as to how much cash value is protected from creditors. Assets held above certain limits in an ILIT are usually protected from the creditor. However, the creditor may attach a demand note to any distributions made from the ILIT.
- Grantor loses personal assets. Unlike traditional life insurance, with an ILIT, there is a complete loss of one’s personal assets. The ILIT is created exclusively for legacy purposes and has no personal benefit to the grantor.
- One also has to take into account the cost of the ILIT. Creating and maintaining an ILIT usually requires assistance from an estate lawyer and these professionals do charge fees for the setup. Plus, filing a gift tax each year by the trust also comes with fees.
WHAT HAPPENS TO THE ILIT WHEN THE GRANTOR DIES?
When the grantor dies, the ILIT will continue to accumulate the interest and then be distributed to the beneficiaries named in the trust by the grantor.
SHOULD YOU GET AN IRREVOCABLE LIFE INSURANCE TRUST?
The question is should one create an irrevocable life insurance trust? Here are a few things you should consider:
- First, for most lower and middle-class Americans, the ILIT has little or no benefit. It is a type of estate plan exclusively reserved for wealthy Americans who want to shield their money from heavy taxes.
- The ILIT does offer benefits beyond taxes. This includes protecting your insurance benefits from creditors, divorce, and any litigation against you and/or your beneficiaries.
- An ILIT also circumvents probate and saves assets from being exposed to extra expenses and loss of privacy during probate.
- Some people use an ILIT to protect the inheritance of a minor child or a member of the family with special needs who is not savvy enough to handle large sums of money.
- An ILIT also helps provide cash to fund a business or to avoid having to sell an asset that is otherwise not easily converted into cash, such as a family farm, home, or business. The inheritance from the beneficiaries can also be used to pay taxes or make charitable donations.
- The current estate tax laws are going to be changed. Even with the federal estate and gift tax exemption at $12.06 million in 2022, it is still possible to owe state estate taxes. It is expected that the federal tax exemptions will revert back to $5 million for individuals and $10 million for couples. For people who have a property that is rapidly appreciating in value or a business that is rapidly growing, one may want to take advantage of this new trust while present tax exemption caps remain in place.
- Aside from the federal estate tax, some states have started to institute their own separate estate tax. Hence, the benefit paid upon death can deliver funding to cover these taxes and related expenses. Wealthy people who reside in states with a state estate tax now regularly use the ILIT in their estate planning.
The key purpose of the ILIT is to lower the value of the individual’s estate in order to lower the estate tax paid on life insurance benefits passed from the grantor to the beneficiaries. The ILIT also protects the trust assets from creditors. However, the government is relooking at setting new caps on estate taxes and exemptions, but when these changes will come about remains to be seen. In any case, if you have significant assets, this type of trust can offer both you and your beneficiaries several benefits. To determine if an ILIT meets your needs and goals, you need a professional estate lawyer to review your estate plan and assess your financial status. He or she can also assist you with getting the correct irrevocable life insurance trust forms.
Elder Law, P.A. is an established firm with experienced attorneys who will be happy to assist in answering any questions you may have. Call us at (561) 588-7512 to learn more.