Irrevocable Life Insurance Trusts

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An Irrevocable Life Insurance Trust (ILIT) is a trust used to purchase a life insurance policy or it can be used to accept a gifted policy, one already owned by the grantor of the trust. ILITs are useful because they ensure that the death benefit proceeds of the policy are not included in an insured’s gross estate while also providing liquidity to the estate. The proceeds of the policy can be used by the beneficiaries to pay taxes and other expenses that arise at the grantor’s death.

The mechanics of an ILIT are quite simple, the trust would be both the owner and beneficiary of the policy. The policy’s owner and beneficiary would need to be updated at the time of gifting, if you were using an already owned policy to fund the trust. Keep in mind, by gifting the policy, the grantor would need to live more than three years from the date the policy was transferred to the trust in order for the proceeds at death to be excluded from the taxable estate. On the other hand, if the policy is applied for and owned by the trust from the inception, the three year wait period is waived and the proceeds will not be included in the estate regardless of the date of death.

Premiums for an ILIT are paid by the trustee from either trust corpus or from gifts given by the grantor. Keep in mind that the trustee is not required to use the gifts to pay the premiums.

ILITs are most useful for those who believe they will be paying significant estate taxes upon their death. The policy owned by the ILIT, upon death of the grantor, will pay out tax free proceeds to the trust which can help alleviate the tax burden of the grantor’s estate assuming everything was set up and executed properly.

If you feel that you may have a significant estate tax liability, contact Mitlin Financial in order to see if you can benefit from an Irrevocable Life Insurance Trust.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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