If you have an estate plan but want to add in some advanced options, one of them that you may want to consider is an irrevocable life insurance trust, or ILIT. This is an estate planning tool that helps you avoid estate taxes on life insurance proceeds. To do this, the life insurance has to be taken out of your estate.
That’s where the irrevocable plan comes in. With the irrevocable life insurance plan, the life insurance benefits that pay out go straight into the irrevocable trust, which means that it cannot be accessed by creditors and will not be taxed as part of the estate.
What happens when you pass away?
When you pass away, the proceeds from your life insurance policy will go into the trust. The trust will then distribute those funds based on the specifics of your trust. Usually, the money is paid out in a lump sum or in increments based on your wishes or your trustee’s judgment.
An ILIT offers excellent tax benefits, because it reduces your tax liability by removing a large payout sum from your estate. If set up correctly, the contributions that are made to the trust may also be paid out without your beneficiaries having to pay the gift taxes they’d normally face. You may also be able to help them avoid the generation-skipping transfer tax, which is a 40% tax that would potentially cost your beneficiaries (those more than 37.5 years younger than you) a large portion of the inheritance you left them.
An irrevocable life insurance plan could be right for you. Our website has more information on what to consider.