The irrevocable life insurance trust, or ILIT, can be a powerful estate planning tool offering significant estate tax savings. Proper planning results in the life insurance proceeds not being included in the estate of the insured for estate tax purposes.
Consideration should be given to creating the life insurance trust ILIT first and having the trustee purchase the life insurance policy and pay the premiums. This can help avoid the three-year rule that might result in the insurance policy proceeds being included in the estate of the insured.
Some irrevocable life insurance trusts – or ILITs as they are commonly known, have a life insurance policy as their only asset. Or, the irrevocable life insurance trust can hold additional assets, with the income from such assets being used to pay the life insurance policy premiums.
The irrevocable life insurance trust can be structured to make the life insurance proceeds available to the surviving spouse without making the proceeds part of the spouse’s estate for tax purposes. There are many creative uses of irrevocable life insurance trusts that can be explored for individuals concerned about the impact of estate taxes.
There are certain legal and IRS rules that must be complied with in order to properly form and maximize the tax benefits of the life insurance trust. You should consult your attorney and tax professional in applying these concepts to your individual situation. Contact Karen Hindson for more information about whether an irrevocable life insurance trust might benefit you.