Find out how life insurance is taxed, and how to set up your policy to avoid it. Irrevocable life insurance trusts (or the Trustee of the trust) should purchase the insurance on behalf of the trust RATHER THAN assigning an existing policy. The trust is administered by the trustee, according to the terms (i.e. Irrevocable Life Insurance Trust Basics. An ILIT is a trust whose primary purpose is to hold a life insurance policy and the cash needed to pay premiums on that policy. Trusts are separate legal entities from the people who create, manage and benefit from them. more Estate Planning With an irrevocable life insurance trust, the grantor-testator did not retain any incidents of ownership, so the benefit is not considered part of the estate for estate tax purposes. Hero Images / Getty. Life Insurance Trusts. The insured is typically the creator of the trust. The beneficiary must agree to any changes in the rights to compensation from these entities. A life insurance trust is a trust that owns the eventual proceeds of your life insurance policy. You can fund your irrevocable life insurance trust in a couple ways: Transfer your existing policy: You may transfer you current policy to the ILIT. Trusts are a good way to provide for heirs, and to make sure money is used based on your wishes. If you’ve earned interest on a life insurance payout, any interest you have received is taxable. An irrevocable life insurance trust is designed so that the proceeds from a life insurance policy held by the trust can pass to the trust beneficiaries without incurring estate tax. They then relinquish ownership of that policy to a trustee who makes decisions on their behalf. The grantor who creates the trust is normally also the insured, but he or she must completely relinquish control over the trust, which means the trust cannot be revocable. Irrevocable Life Insurance Trust Uses. Life insurance is one of the best ways to provide for your family and loved ones in the event of your death, and an irrevocable life insurance trust can address various estate planning problems. An irrevocable life insurance trust can be an important part of your estate plan. A life insurance trust is an irrevocable estate-planning tool that allows a person to place the proceeds of his life insurance policy out of his estate. An insurance trust is an irrevocable trust set up with a life insurance policy as the asset, allowing the grantor to exempt assets from a taxable estate. An irrevocable life insurance trust was set up for my children using 10 term life and life insurance from my former spouse’s company. To be Medicaid compliant, meaning a funeral trust won’t count as an asset for eligibility purposes, the trust must be irrevocable. Due to the high estate tax exemptions currently, this inclusion by the IRS does not affect most individuals or families. An Irrevocable Life Insurance Trust (ILIT) has long been a fundamental tool for managing federal estate tax liabilities. An Irrevocable Life Insurance Trust can be used as a vehicle to hold insurance policies so that the death proceeds are payable to the trust and pass to the trust beneficiaries free of estate tax. But with a sizable increase in the federal estate tax exclusion, some families are wondering if their ILIT is even relevant anymore. It's a good idea to speak to an experienced trust attorney who … What an irrevocable life insurance trust looks like. As far as Medicaid is concerned, the funds in this type of funeral trust no longer belong to the applicant. Cash in the trust might also be used to purchase a single premium life insurance policy that could provide a significantly increased amount that will pass to your beneficiaries. One way second to die life insurance can be extremely effective is to fund an Irrevocable Life Insurance Trust a/k/a ILIT as part of a complete estate plan. The trust beneficiaries can then use those proceeds for their living needs or to pay whatever share of estate tax is generated by the business. As a result, the proceeds are not counted in your estate when you die. This appears to be (1) no benefit for children (2) Term Life and life insurance from a … But there are specific requirements your trust must meet, discussed below. The three key players in a trust are: The grantor. Once you create a life insurance trust, you are no longer the legal owner of the insurance policy—instead, the trust is. They aren’t counted as part of your estate—an important distinction when you consider the death benefits on many whole life insurance policies may be millions of dollars, significantly increasing the gross worth of your estate. ILITs are constructed with a life insurance policy as the asset owned by the trust. Life insurance policies come in many flavors, and they guarantee a reasonably large cash payout down the road for a relatively small investment now. An irrevocable life insurance trust (or ILIT) is more straightforward than it sounds. However, federal tax rules explain that you will need to wait 3 years for the irrevocable life insurance trust to be effective. People generally use a permanent life insurance policy, such as whole life insurance or universal life insurance, to fund an irrevocable life insurance trust. Irrevocable Life Insurance Trusts, or ILITs, have long been a staple of estate planning, helping individuals, families and business owners meet a wide range of goals. The irrevocable life insurance trust (ILIT) is used to shield assets, in this case life insurance, by removing the ownership and control of the policy from the estate. The creator of the trust is called the Grantor, or the Settlor, or the Trustor. An ILIT owns your life insurance policy for you, essentially removing it from your estate. If an existing policy is assigned to an irrevocable life insurance trust , the IRS will require that the proceeds are still part of your estate if you die within 3 years of the transfer. Types of assets that can be used to fund the trust include life insurance policies, real estate, securities or cash and an interest in a business. An insurance trust is an irrevocable trust set up with a life insurance policy as the asset, allowing the grantor to exempt assets from a taxable estate. How a life insurance trust works. To properly fund an irrevocable life insurance trust, federal estate tax law requires that the policyholder, the insured, must not have any type of ownership in the proceeds whatsoever. A life insurance policy can fund a trust that eventually creates some available cash for future expenditures, such as anticipated estate taxes. You should think carefully before establishing a living irrevocable trust because you can’t make changes to the trust during your lifetime, but with a life insurance trust, the choice is easy because the only asset in the trust is the life insurance policy. If you don’t have (or perhaps don’t need) an ILIT, you should still understand how second to die life insurance may strengthen your overall estate planning strategy. Writing a life insurance, or life assurance, policy in trust can help your family avoid a big tax bill on the payout they receive. However, because the trust is irrevocable, you cannot change the trust beneficiaries at a later time. You usually don’t have to report them, but there are exceptions. With an irrevocable life insurance trust, the trust owns your life insurance policies and other assets. Crummey power. The trust holds the insurance policy with you as the named insured and when you die, the insurance benefit is paid to the trust. When you’re funding the trust, you can use you might want to use something called the Crummey powers to your advantage. This is unlike a Will or Living Trust that you can change at a later time in response to changing wishes regarding beneficiaries. When funding life insurance policies in an ILIT, one issue that comes up every time is how to get the money into the trust. How To Fund Your Irrevocable Life Insurance Trust Shane Flait (2014) The purpose of an irrevocable life insurance trust (ILIT) is to keep the death benefit of life insurance on your life out of your estate so as to eliminate the estate taxes that would rob some of those proceeds when you die. The IRS notes that life insurance payouts are typically not included among your gross assets. If a couple wants to use a trust to keep money out of an estate, they typically purchase survivorship life insurance, also called a second-to-die policy. Many clients are unaware that the value of their life insurance policies may be includable in the value of their estates at the time of their death. If you die within 3 years of the transfer, the proceeds will be subjected to the federal estate tax. This was supposed to be put in place to cover child support in the event of my former spouse’s death. No where does it state that money can be used for children. The insurance trust owns your life insurance policy. Stated differently, the funds in the trust cannot be refunded, nor can the trust be cancelled or changed. The Irrevocable Life Insurance Trust (ILIT) has long been a staple of estate planning – a means of avoiding the death benefit of a life insurance policy from being subject to estate taxes by having it owned not by the insured or family themselves, but an independent third-party trust holding the life insurance for the family’s (beneficiary’s) benefit instead. Recipients may be required to pay income tax on distributions. A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. An irrevocable life insurance trust (ILIT) is a useful estate planning device used to manage life insurance policies and dispose of policy proceeds. An irrevocable beneficiary is a beneficiary in a life insurance policy or segregated fund contract. Irrevocable Life Insurance Trusts and Crummey Letters. Here's how it works. 6. The grantor sets up a trust and gives that trust an insurance policy to hold onto. An irrevocable life insurance trust (ILIT) is a trust that cannot be rescinded, amended, or modified, post creation. And life insurance is one of the best ways to fund a trust. Life insurance is a common tool used to fund estate taxes and expenses upon the death of an individual and the transfer of a large estate. Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. It keeps it out of your estate by the trust owning the life insurance policy on your life.