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IRREVOCABLE LIFE INSURANCE TRUST (ILIT)

The ILIT is an irrevocable trust which holds assets outside of your estate. This will exempt these assets from estate taxes upon your death. An ILIT is often named as the owner and beneficiary of a life insurance policy. This will make certain that the insurance proceeds are passed to the beneficiaries without first being taxed. The ILIT produces the following benefits:

  1. Less Taxes. Because the ILIT now owns the insurance policy, you retain no ownership interest, so the proceeds of your insurance will not be included in your “taxable estate” upon your death. Less taxes means you save money!
  2. Gift Tax Exclusion. Withdrawal powers are included in the ILIT. This allows you to take advantage of the annual gift tax exclusion to add to the trust or to pay premiums.
  3. Liquid Funds to Pay Taxes. Upon your death your estate will need to pay its debts, costs, and taxes. If your estate is not liquid, the Trustee of your ILIT may allow the ILIT to make loans to your estate, or allow the ILIT to purchase assets from your estate. This does not cause such payment from the ILIT to be included in your “taxable estate,” but still allows liquidity.
  4. Control. Even though the trust is irrevocable, you still retain control over the financial instruments held by the trust.

Who needs one? When you die, everything that is in your name and all those things that you control, are considered to be in your “taxable estate.” Federal taxes are due on all assets valued at over the applicable exclusion amount. In the case of a married couple with a tax saving A/B or “marital deduction” living trust, taxes are only due on assets valued at more than twice the applicable exclusion amount.

Your “taxable estate” includes the cash value of your life insurance death benefit if you are the owner or if you pay the premiums. You may establish an irrevocable life insurance trust to own your life insurance policies. Since the trust is irrevocable, and since you are not the trustee, the insurance proceeds are no longer considered a part of your taxable estate.

If your estate is approaching the estate tax limits, an irrevocable life insurance trust may reduce your estate taxes. With this trust, your life insurance proceeds will not be subject to any federal estate taxes at all.