How Does an Irrevocable Life Insurance Trust Operate?

The avoidance of estate taxes and the frequently expensive and prolonged process called probate, are 2 crucial objectives of many estate plans. For those who have substantial possessions that they anticipate leaving to family and liked ones, estate taxes are a popular consideration when estate planning. Although the estate tax rate changes on a regular basis, it is generally incredibly high– frequently hovering around 50 percent.

One strategy that is frequently used to prevent subjecting assets to estate taxes, along with to prevent probate, is the irrevocable life insurance trust, or ILIT.
As implied by the name, an ILIT is a trust that can not be withdrawed, modified or changed as soon as developed. The principal purpose of the trust is to lawfully own a life insurance coverage policy that will pay out to the recipients you named in the trust document upon your death.

An ILIT needs you to designate a trustee to manage the trust. A trust document is then drafted by your estate planning attorney and carried out by you. As soon as the trust document is signed, the trust becomes a different legal entity. The trust must get a tax identification number and file annual income tax return. You, as the grantor, then provide money to the trust as a present. Make certain not to provide more than the current tax exempt gift limit for the year. That money is then used by the trustee to buy a life insurance policy on you. Recipients are named according to the regards to the trust– typically your loved ones or family members. Each year, you gift additional funds to the ILIT to continue to pay the premiums on the policy. When you die, the earnings of the life insurance policy are then paid out to the beneficiaries called in the policy.
The benefit to an ILIT is that the life insurance coverage policy is never ever owned by you. As such, it is not subject to estate taxes. The proceeds of the life insurance coverage policy are typically moved straight to the beneficiaries rather of becoming part of the probate process. Because the policy and profits were not owned by you, they are ruled out part of your estate for probate purposes. Similar to many trusts and estate planning tools, there are exceptions, considerations and unique situations that need assessment with an estate planning attorney.

For those who have considerable assets that they prepare for delegating household and loved ones, estate taxes are a prominent factor to consider when estate planning. Although the estate tax rate modifications on a routine basis, it is usually exceptionally high– typically hovering around half. One tactic that is often used to prevent subjecting possessions to estate taxes, as well as to avoid probate, is the irrevocable life insurance coverage trust, or ILIT.

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