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Three reasons to create an irrevocable life insurance trust

On Behalf of | May 17, 2024 | Trusts

Realizing your children, grandchildren and other heirs can receive your wealth after you die may give you satisfaction in building up your assets. Your life insurance policy could be one way you want to deliver a payout to your family. However, you might have concerns that your policy will not go as far as you want to provide for your loved ones.

Some people create a trust just for their life insurance, called an irrevocable life insurance trust. While it may seem redundant to use this option when your life insurance already pays out to beneficiaries outside of probate, ILIT creators often have good reasons to compose this kind of trust.

Reduce estate taxes

If your estate is valued above a certain threshold, your beneficiaries may be subject to substantial estate taxes. These taxes can significantly reduce the inheritance you intend to leave behind.

By creating an ILIT, you may remove the life insurance policy from your taxable estate. Since the trust owns the policy, the death benefit proceeds are not a part of your estate’s value. This can result in significant tax savings for your beneficiaries.

Create control over the distribution of assets

An ILIT allows you to have greater control over how to distribute your life insurance proceeds. You can specify the conditions and timing for your beneficiaries to receive the funds.

This arrangement ensures that your wishes are carried out precisely as you intended. For instance, you could set up the trust to distribute funds over time or tie distributions to specific milestones, such as getting a college education or purchasing a home.

Protect assets from creditors

If you leave your life insurance proceeds directly to your beneficiaries, those assets may be vulnerable to claims from creditors or lawsuits. However, when an ILIT holds the proceeds, they receive protection from such risks. The trust acts as a legal barrier, ensuring that your beneficiaries receive the full intended inheritance.

Creating an ILIT is not for everyone. You might not want to lose control over your life insurance, as an ILIT is irrevocable, so you cannot modify its terms or abolish it. Still, like any method of estate planning, it is worth the time to consider if you have assets you want to protect for future generations.


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