You may have heard the term ILIT, which stands for Irrevocable Life Insurance Trust in the context of estate taxes and planning for your legacy. These are financial tools that may fit into your overall plan for your estate but do come with advantages as well as potential risks. There are three primary stakeholders involved in an irrevocable life insurance trust. These include the grantor, which is the person who creates the trust and chooses a trustee to manage it.
The trustee who pays the life insurance premium, making payouts to beneficiaries after the original grantor has passed away, and beneficiaries who are chosen to receive the policy benefits. The purpose of creating such a trust is to hold a life insurance policy. This removes the policy from being part of the grantor’s estate and therefore means the proceeds from that policy are not part of the overall estate value.
The trust owns and pays the life insurance policy or any policies in the trust rather than the policy owner directly. There are tax advantages and legacy planning opportunities available with irrevocable life insurance trust. However, they can be taxable depending on the creation time of the ILIT and when you pass away. It is important to remember that you do not own the life insurance policy. Once you assign a life insurance policy to an ILIT, you are not able to reassign that policy to another entity or trust.
Since you have waived all rights to its coverage, working with a qualified estate planning attorney is one of the best ways to make sure you understand when and how to use an ILIT for estate planning reasons. Contact our Pasadena estate planning office to get more support with your next steps.