When it comes to estate planning, one of the most powerful tools available is the Irrevocable Life Insurance Trust, commonly referred to as an ILIT. While it may sound complex, the concept is straightforward: an ILIT is a type of trust. The ILIT is specifically designed to own and control a life insurance policy outside of your taxable estate.
What Is an Irrevocable Life Insurance Trust?
An ILIT is a trust that you create during your lifetime. Once it’s established, the trust becomes the legal owner of a life insurance policy you fund or transfer to it. Importantly, the trust is irrevocable, meaning once it’s set up, you cannot change its terms or take back the assets. While this may sound restrictive, it offers a host of benefits that can protect your family and your estate.
How Does an ILIT Work?
You, as the grantor, set up the trust and appoint a trustee (this should not be you). The trustee then purchases a life insurance policy on your life or you transfer an existing policy into the trust. When you pass away, the insurance proceeds are paid to the trust, not your estate, and the trustee distributes the funds according to your instructions—often to your children, spouse, or other beneficiaries.
Key Benefits of an ILIT
1. Estate Tax Reduction
One of the primary benefits of an ILIT is that it keeps the life insurance death benefit out of your taxable estate. Without an ILIT, the IRS may include your life insurance proceeds when calculating estate tax liability, potentially subjecting it to a 40% federal estate tax (if your estate exceeds the exemption threshold). An ILIT shields these funds.
2. Asset Protection
Since the insurance proceeds are owned by the trust—not you—they are protected from your personal creditors and, in most cases, from the creditors of your beneficiaries.
3. Control Over Distributions
An ILIT allows you to set specific terms on how the money is distributed after your death. You can stagger distributions by age, provide for education expenses, or set up ongoing income support.
4. Liquidity for Estate Needs
An ILIT can provide cash to pay estate taxes, debts, or final expenses without forcing the sale of other assets like a family business or real estate.
5. Support for Minor or Special Needs Beneficiaries
You can structure the ILIT to manage and distribute assets to beneficiaries who are minors, financially inexperienced, or who have special needs, while preserving their eligibility for government benefits.
A “Crummey Letter” Explained
To ensure contributions to the ILIT qualify for the annual gift tax exclusion, beneficiaries are typically given temporary withdrawal rights over the funds you contribute. This is done through a notice called a Crummey letter, informing beneficiaries of their right to withdraw contributions (usually for 30 days), even if they don’t actually exercise that right.
More Things To Consider About ILIT Trusts
While an Irrevocable Life Insurance Trust may not be necessary for every estate, it can be an essential tool for those with substantial life insurance coverage or who are concerned about estate taxes, creditor protection, or long-term control over their wealth. Because ILITs are irrevocable and require careful structuring, it’s important to work with an experienced estate planning attorney to set one up properly and to understand what is needed for a well-thought-out estate plan.
Tulsa Will and Trust Attorneys
If you’re considering ways to protect your estate and provide for your loved ones efficiently, call our office to schedule a consultation. We can help you determine whether an ILIT is right for your unique financial and family situation. For a Free Consultation with a Tulsa Estate Planning Attorney at Tulsa County Lawyers Group, call 918-379-4864. You can also ask a free online legal question by following this legal link.
