Irrevocable Life Insurance Trust: The Ultimate ILIT Guide

People are often unaware that, when they die, their estate can include the death benefit of their policy (depending on the policy’s value) because of tax laws. This means their beneficiaries will have to pay estate taxes on their death benefits. But setting up an irrevocable life insurance trust, often referred to as an ILIT, is a great way to avoid this issue. What exactly is an ILIT, how is it set up, and what are the pros and cons?

What Is an Irrevocable Life Insurance Trust?

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An Irrevocable Life Insurance Trust is a type of trust that is made to hold a single or multiple life insurance policies to avoid any federal estate taxes. In other words, if you have a life insurance policy, you can transfer it to an ILIT, which will then own your life insurance policy. The amount of the death benefit is removed from your estate, meaning that your beneficiaries won’t have to pay taxes on that money.

If you’re interested in transferring your life insurance policy to an ILIT, you have to be aware that the trust cannot be changed or revoked after it is created. But when you pass away, any beneficiaries that you have will get all of your life insurance policy proceeds without any estate tax penalty.

How Does An ILIT Work?

When choosing an irrevocable life insurance trust, it is important to know that if your life insurance is maintained by the trust, meaning you will no longer own your policy. The irrevocable life insurance trust will own the policy and will be considered the beneficiary of the life insurance policy. 

ILIT Pros & Cons

An ILIT can be advantageous because having one:

  • Can lower the amount of life insurance coverage that is needed, since your family will have to pay less in estate taxes.
  • Reduces your estate size.
  • Gives you control over how, why, and when your beneficiary gets your death benefits.
  • Protects you from creditors by protecting your policy’s cash value.green thumbs up next to a red thumbs down

As with any policy, there are some potential disadvantages, including:

  • It is irrevocable, which means you will relinquish control over the trust and give up all rights, meaning you will be unable to change beneficiaries, withdraw funds, or even end your policy.
  • If you die within three years of transferring your policy to an ILIT,  your policy reverts to your estate, which means your beneficiaries might still have to deal with estate taxes.
  • Irrevocable life insurance trusts are not cheap: setting one up can cost anywhere from several hundred dollars to a few thousand dollars.

Is an Irrevocable Life Insurance Trust Right for You?

An ILIT gives your beneficiaries estate liquidity (the cash available in the estate or the assets such as investments that can easily be turned into cash) on a transfer tax-free basis. But they can be quite expensive and do come with some disadvantages as noted above. That means an ILIT is generally a good idea if you have a significant amount of wealth and assets you need to protect after you pass. If you want to avoid hefty estate tax and creditors, as well as set up your family after you pass, an ILIT might work for you.

Need Help?

Your family has financial obligations that will not go away when you are gone; they will need your help more than ever with their expenses, and the last thing you want them to worry about is money while they are grieving. There are many great affordable life insurance options to choose from that will provide enough money for your family, for a low monthly price. The best way to find the right life insurance policy for you and your specific needs is by working with an agent who specializes in life insurance. We have provided the top life insurance companies in the nation below; each offers hassle-free assistance and the most competitive rates. Always check multiple sites to make sure you have bargaining power and know the advantages of each company. Make sure a hard time isn’t made harder by a financial burden, check life insurance rates today.

About The Author: Cassandra Love

With over a decade of helpful content experience Cassandra has dedicated her career to making sure people have access to relevant, easy to understand, and valuable information. After realizing a huge knowledge gap Cassandra spent years researching and working with health insurance companies to create accessible guides and articles to walk anyone through every aspect of the insurance process.
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