An irrevocable life insurance trust (ILIT) is a legal arrangement that owns and manages life insurance policies for the benefit of beneficiaries. By establishing an ILIT, individuals can achieve several significant benefits on their estate planning and wealth preservation strategies. In this post, we will explore the advantages of an ILIT.
Estate Tax Planning
One of the primary benefits of an ILIT is its ability to mitigate estate taxes. When a person owns a life insurance policy on their own life, the death benefit is generally included in their taxable estate upon their death. This can potentially lead to a significant tax burden for the beneficiaries.
However, by transferring ownership of the policy to an ILIT, the policy proceeds are removed from the insured’s estate. As a result, the death benefit is not subject to estate taxes. This would provide potential tax savings and preserving more wealth for the beneficiaries.
Asset Protection
Assets held within an ILIT can be protected from creditors, lawsuits, and other potential claims. Since the trust is irrevocable, the assets are considered separate from the grantor’s estate and are shielded from creditors’ reach.
This can be particularly valuable for individuals in professions or situations with higher litigation risks. By placing life insurance policies within an ILIT, individuals can ensure that the death benefit remains protected for their loved ones, even in the face of potential financial challenges.
Control and Management
An ILIT allows the grantor to exert control over the distribution and management of the life insurance proceeds. The grantor can designate a trustee, who will oversee the administration of the trust and ensure that the funds are distributed according to the grantor’s wishes.
This control can be particularly valuable when there are concerns about the beneficiaries’ ability to handle large sums of money responsibly. The trustee can follow specific instructions provided by the grantor, such as distributing funds for education, medical expenses, or other specific needs.
Flexibility
Although an ILIT is irrevocable, it can still offer a certain degree of flexibility. For example, the grantor can include provisions within the trust that allow for the amendment of beneficiaries or the power to change trustees.
This flexibility can be useful if circumstances change over time, such as divorces, births, or deaths within the family. Additionally, the grantor can structure the trust to provide income to a surviving spouse, while still preserving the principal for future generations.
Medicaid Planning
For individuals concerned about potential long-term care costs and qualifying for Medicaid benefits, an ILIT can be a valuable tool. By transferring life insurance policies to an ILIT at least five years before applying for Medicaid, the applicant can exclude the policies’ cash value from their assets.
This can help meet Medicaid’s asset eligibility requirements and protect the policy’s value for the benefit of the ILIT’s beneficiaries.
Business Succession Planning
An ILIT can also be beneficial for business owners who want to ensure a smooth transition of ownership upon their death. By using life insurance policies owned by an ILIT, the trust can provide the necessary funds for the purchase of the business interest from the decedent’s estate.
This can help prevent the need for a forced sale of the business or disruption in its operations. This ensures continuity and financial stability for the surviving business partners or family members.
Put Your Estate Plan in Place!
The federal estate tax is only applicable on the portion of an estate that exceeds $12.92 million. Most people do not have to be concerned about it. However, we like to share information about all of the tools that are out there.
Even if your estate will not be subject to taxation, professional guidance is invaluable when you are preparing your legacy for eventual distribution. There are many ways to proceed. We can get an understanding of your unique situation and help you make the right choices.
If you’re ready to get started, you can request a consultation at our Oklahoma City office by calling 405-843-6100. You can reach the Tulsa location at 918-615-2700. There is also a contact form on this site if you would prefer to send us a message.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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