How Does an Irrevocable Life Insurance Trust Operate?

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by: SchneiderLawOR
Word Count: 4258
Date: Mon, 16 Jan 2012 Time: 7:21 AM

The avoidance of estate taxes and the often costly and lengthy process known as probate, are two important goals of many estate plans. For those who have substantial assets that they anticipate leaving to family and loved ones, estate taxes are a prominent consideration when estate planning. Although the estate tax rate changes on a regular basis, it is typically extremely high -- often hovering around 50 percent. One tactic that is often employed to avoid subjecting assets to estate taxes, as well as to avoid probate, is the irrevocable life insurance trust, or ILIT.

As implied by the name, an ILIT is a trust that cannot be revoked, modified or amended once created. The principal purpose of the trust is to legally own a life insurance policy that will pay out to the beneficiaries you named in the trust document upon your death.

An ILIT requires you to appoint a trustee to oversee the trust. A trust document is then drafted by your estate planning attorney and executed by you. Once the trust document is signed, the trust becomes a separate legal entity. The trust must obtain a tax identification number and file yearly tax returns. You, as the grantor, then give money to the trust as a gift. Be sure not to give more than the current tax exempt gift limit for the year. That money is then used by the trustee to purchase a life insurance policy on you. Beneficiaries are named according to the terms of the trust -- usually 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 proceeds of the life insurance policy are then paid out to the beneficiaries named in the policy.

The advantage to an ILIT is that the life insurance policy is never owned by you. As such, it is not subject to estate taxes.  The proceeds of the life insurance policy are generally transferred directly to the beneficiaries instead of becoming part of the probate process. Since the policy and proceeds were not owned by you, they are not considered part of your estate for probate purposes. As with most trusts and estate planning tools, there are exceptions, considerations and special circumstances that require consultation with an estate planning attorney.

About the Author

Experienced estate planning attorneys Portland OR  of the Law Offices of Richard B. Schneider LLC offers estate planning and business planning resources to residents of Portland OR. To learn more about these free resources, please visit www.rbsllc.com today.

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