What’s an irrevocable life insurance trust? And how can it help your heirs avoid serious tax penalities on your estate?
Here’s an inside look at how an irrevocable life insurance trust works–and what you can to do to set one up on your own.
If You Got Assets, You Wanna Protect Them
For those with a high net worth, estate planning is essential to making sure their heirs get the majority of the assets they are leaving behind. Without proper planning estate taxes can take a significant portion of the inheritance, and if the inheritance is in mostly real estate and other non-liquid assets it can force the heirs to sell the property for less than it is worth just to pay for the taxes.
As devastating as this can be, there are ways to plan for the upcoming tax hit, and using life insurance is one of the best ways to prepare for the upcoming estate problem.
Life Insurance Vs. Life Insurance Trust
Using life insurance proceeds a person can pay the estate taxes so the existing assets can pass to the heirs and they will not have to worry about paying off the government. But if a person just buys a large whole life insurance policy, or a large universal life policy, it will simply add to their estate–causing an even bigger problem.
To get around this, most people purchase the insurance, and place it inside of an irrevocable life insurance trust. (These trusts move the assets outside of their estate, lowering the amount of the assets that are applicable to be taxed.)
Benefits of an Irrevocable Life Insurance Trust
There are a number of different trusts that can be used for estate planning, but there are not many that are more versatile as the ILIT.
The reason the ILIT is such a great planning tool, is that the trust does not have an owner. This means once the money has been put into the trust it is not owned by anyone. It also means it can grow tax free as long as the policy is in force.
Because the trust has no owner, there is nobody that can cancel or change the policy. So as long as there is an estate problem, and as long as those who started the ILIT continue to give money to pay the premiums, the insurance will be around to help the heirs of the estate.
One of the hardest parts of setting one up is the number of people and the number of steps involved. An attorney needs to draw up the paperwork, a financial advisor to provide the insurance policy, and an institution to manage the living trust.
Setting one up is time-consuming, but in the end the tax benefits of having an ILIT is much better than paying more in taxes than necessary. Good luck setting up your own irrevocable life insurance trust.
