What are irrevocable life insurance trust notes?

If you are starting your estate planning process, an ILIT (irrevocable life insurance trust) will give you peace of mind. If you have young beneficiaries or substantial wealth, the trust may provide control over a life insurance policy.

The irrevocable aspect of the trust ensures that the creator or grantor will not be able to change it after it is established. ILIT is primarily used as a financial and estate planning tool to protect assets subject to high estate taxes.

What do you need to know about an irrevocable life insurance trust?

A revocable trust allows the grantor to make changes to the trust. You can also terminate the trust if you wish. An irrevocable trust will not allow changes to be made after it is set up. Only the beneficiaries will be able to change the trust.

Revocable trusts are more common as they offer flexibility to the trust creator. An irrevocable life insurance trust is a good idea if you want to save taxes.

A grantor will establish the irrevocable trust and fund it. Then, transfers and gifts are made to the trust. Transfers and gifts are permanent. Changes to the trust and its funds are not allowed after its incorporation.

The trustee manages the trust. Distributions made to beneficiaries are also administered by the trustee. The trustee managing the trust is different from the grantor.

Benefits of an irrevocable life insurance trust

  • Lower estate tax

Death benefits will not be part of your gross estate when you opt for an irrevocable trust. This means that the benefits are not subject to state and federal estate taxes.

The trust may also cover debts and estate tax costs when the estate makes purchases. The grantor will not be able to make the purchases since the estate is now part of the trust.

It is important to know that although the estate is exempt from estate taxes, the beneficiary’s estate will be subject to such taxes. The tax burden is transferred to the beneficiaries.

When ILIT is written correctly, it helps provide liquidity. This will help pay for estate taxes and other expenses and debts. It is carried out by means of a loan or purchase of assets belonging to the grantor’s patrimony.

Lifetime donations will help reduce taxable wealth. This is done by transferring assets to an irrevocable life insurance trust.

  • Protect assets from creditors

An irrevocable trust may protect you from certain legal procedures. Protect assets from creditors by creating a trust.

Creditors, however, may garnish distributions made with ILIT.

  • Avoid gift taxes

The grantor’s contributions to the beneficiaries are considered gifts. If you want to avoid gift taxes, it is important that the trustee notify the beneficiaries of the right to withdraw.

The letter notifies the beneficiaries of the right to withdraw for a period of 30 days.

After the 30-day period, the trustee will be able to pay the life insurance premium using the contributions.

The transfer of the annual gift tax can be excluded as the letter converts the gift to present interest rather than future interest. This helps avoid the need to file a gift tax return.

  • Leave assets to minors and guarantee responsibility

Minors are not equipped to handle large amounts of money and assets. An irrevocable trust will allow you to set restrictions to protect assets.

Restrictions can be established such as that the beneficiaries reach a certain age to access the assets. Creating a trust will help ensure responsible behavior by adults or minors with reckless spending habits.

The trust is overseen by a designated trustee. Assets will be distributed according to the grantor’s wish. This provides asset protection for the beneficiaries.

Since ILITs are not owned by the beneficiaries, the assets are protected even if there is future litigation involving the beneficiaries.

Linking assets to the beneficiary is difficult. This prevents creditors from accessing the assets.

  • Government benefits

Trust beneficiaries who receive government assistance (Medicaid or Social Security Disability Income) are protected with income received from a life insurance policy purchased by an ILIT.

The trustee will be able to control how the trust distributions are used. This is done carefully so that it does not interfere with the beneficiary’s right to get help from the government.

  • Legacy planning

The tax on non-generation transfers stipulates a 40% tax on transfers and donations in trust. The tax also applies when the donation or transfer is made to people unrelated to the donor more than 37.5 years younger.

Related persons who are more than at least one generation younger than the donor will also be covered under the tax provisions. Donors who give goods to their grandchildren instead of their children is a common example.

ILIT will help the grantor to take advantage of the exemption from the transfer tax due to omission of generation. Donations to the trust are used to fund and purchase the insurance policy.

Since death benefits are excluded from the grantor’s estate, multiple generations of the family (children, grandchildren, and great-grandchildren) will be able to benefit from the trust assets.

Disadvantages of an irrevocable life insurance trust

  • There are certain tax benefits that become applicable only when the grantor lives three or more years after transferring the insurance policy to the trust. The IRS will begin to include insurance income if the period is less than specified.

When ILIT purchases the insurance policy, you will be able to avoid a specified three-year period. The trust will have to finance to pay the premiums.

  • When you give money from the trust to a policy, you are subject to gift tax. Gift taxes can be avoided if recipients are sent letters notifying them that the money is not immediately accessible to them.

  • The biggest drawback to ILIT is that it cannot be changed once established. You will have to give up full control of the assets. Other than this dissolution of the trust, it is not possible unless the payment of the premiums is not stopped.

  • When the beneficiaries receive the estate, they will have to pay considerable taxes.

How to configure an ILIT?

Setting up an ILIT is a complex process. Start the process by selecting an attorney who specializes in estate planning.

Before drafting the trust document, you will need to make the following decisions:

  • Who will be the trustee of ILIT?

  • Who will be the beneficiary or beneficiaries of the insurance product?

  • Will you transfer an existing policy to the trust or purchase a new life insurance policy?

Before making these important decisions, it is recommended that you give them a lot of thought. You will not be able to change any of these decisions after establishing an irrevocable trust.

ILIT is named as beneficiary of the life insurance policy. This means that the payment will go directly to the ILIT in the event of death.

Beneficiaries will receive benefits without paying any income or wealth tax. Finances the trust for the payment of premiums. This ensures that the insurance policy does not expire.

Who are the beneficiaries of an ILIT?

The main beneficiary of the insurance policy is ILIT. Death benefits are transferred to ILIT. These benefits are held in trust for the benefit of the beneficiaries named in the trust documents.

If the trust proceeds are held for the benefit of the spouse, regular incremental payments are received instead of a lump sum. Incremental payments are not taxed.

What are property incidents?

If you own the insurance policy and keep it, you can change the beneficiaries or withdraw the cash value at any time. This means that the tax authorities will include the proceeds from the insurance policy when calculating the property’s value.

If earnings are high, the estate will be liable to pay estate taxes. This is possible when the estate is the beneficiary of the policy.

The policy will be an asset of the estate if it is owned by you at the time of death and even if children, grandchildren or great-grandchildren or another person are named as beneficiary.

How to dissolve an ILIT?

Once an irrevocable trust is created, it cannot be undone. It will be necessary to pay the premiums to keep the insurance policy in force. If you want to dissolve the trust, all you need to do is stop the premium payments.

The insurance policy will expire if the premiums are not realized.


An irrevocable life insurance trust is a good idea if you have a significant amount of assets and estate and want to protect it after your death. This will also help avoid creditors and high estate taxes.

You must remember that ILIT may not be suitable for everyone. After setting up the trust, you will not be able to make any changes. Only the beneficiaries of the trust will be able to approve any changes to the trust.

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