There are many different types of trusts, each of which offers unique benefits. Those who are thinking about their legacy after they die, the protection of dependent family members and their comfort in their golden years often create and fund trusts as part of a comprehensive estate planning effort.
One of the options for those hoping to provide support for their loved ones after their passing is an irrevocable life insurance trust (ILIT). What should a testator know about an ILIT?
ILITs can manage two types of policies
An ILIT is a trust specifically established to manage and distribute the proceeds from life insurance policies. The person creating the trust could fund it with either a traditional individual life insurance policy or a second-to-die policy. Such policies apply to two individuals, often spouses or co-parents, and only pay out after both individuals have died. An ILIT can manage the proceeds from either type of life insurance policy.
ILITs can shield children from inheritance loss
Minor children and adult dependents with special needs are often incapable of inheriting assets directly. Their guardian or surviving parent would have control over any inherited resources until they reach adulthood. The possibility of a guardian or parent misusing a child’s inheritance is a legitimate concern for those trying to provide financial support for their dependents.
An ILIT holds life insurance proceeds on behalf of those who cannot inherit them directly. The trustee then distributes the proceeds in accordance with the instructions of the trust creator. It is possible to set the funds aside until the recipients reach a certain age or to limit the use of the funds for very specific situations, like medical costs and educational expenses.
ILITs provide tax and debt collection protection
A sizable life insurance policy could put someone at risk of estate taxes if it pushes the total value of their estate over the current exemption threshold. It could also be at risk of creditor claims during the probate process. Arranging to have the funds go directly to a trust will diminish the likelihood that life insurance generates tax liability or could be at risk of creditor claims after someone’s death.
Learning about different types of trusts may help people choose the right tools for leaving lasting support for their loved ones when they die.