Estate planning often raises questions about how property passes to heirs and how taxes affect that process. One option available involves an irrevocable life insurance trust, also called an ILIT. This trust holds life insurance policies and controls how the proceeds reach your heirs. We explain what an ILIT does, how it works, and whether it fits within your estate plan.
What an Irrevocable Life Insurance Trust Does
An irrevocable life insurance trust, or ILIT, holds ownership of life insurance policies. The main benefit comes from removing those policies from your taxable estate. That step protects the insurance payout from estate taxes. Your heirs then receive more of the benefit you intended to provide.
An ILIT also supplies money at the time of death. Estates often face large tax bills and other debts that require immediate payment. Insurance proceeds inside the trust cover those costs without forcing heirs to sell property or investments.
How an Irrevocable Life Insurance Trust Differs from Other Trusts
Revocable trusts allow the grantor to make changes or dissolve the trust. Irrevocable trusts, including ILITs, do not. Once you create the trust and transfer ownership of your policy, the arrangement remains fixed. That structure keeps the insurance payout outside your taxable estate.
Other trusts handle different goals. Charitable trusts direct property to nonprofits. Special needs trusts protect benefits for disabled heirs. Revocable trusts help with asset management during life. An ILIT serves a narrower purpose: it holds life insurance policies and directs those proceeds to heirs without subjecting them to estate taxes.
Reasons to Create an Irrevocable Life Insurance Trust
Many people create ILITs to avoid estate tax. If your estate exceeds the federal exemption, currently set at $13.61 million, the value above that limit may face estate tax. Moving a policy into an ILIT takes the payout out of your taxable estate. That step preserves more wealth for your heirs.
Another reason involves liquidity. Tax bills and debts require cash, not property. Real estate and investments may take time to sell. With an ILIT in place, your heirs gain immediate access to funds from the insurance payout. That helps them cover costs without needing to part with other assets under pressure.
Tax Advantages Linked to an Irrevocable Life Insurance Trust
The tax advantage lies in exclusion from the taxable estate. Insurance payouts within the trust pass to heirs free from federal estate tax. That advantage proves valuable for large estates that exceed the exemption.
You should consider the gift tax rules when funding an ILIT. Each premium payment that goes into the trust counts as a gift. Federal law provides an annual gift tax exclusion, which permits you to give a certain amount without gift tax. Contributions above that limit require a gift tax return. Even then, your lifetime exemption often offsets any immediate tax owed.
How Beneficiaries Benefit from an Irrevocable Life Insurance Trust
ILIT trusts benefit heirs directly from the exclusion of insurance proceeds from your estate. They receive more of what you intended to leave. The trust also shields proceeds from creditors and legal claims. That protection ensures money reaches your heirs instead of third parties.
Common Questions About Irrevocable Life Insurance Trusts
Many clients ask if they can access the funds inside the trust. Once you create the ILIT, you give up control. You cannot withdraw money or reclaim ownership of the policy. That lack of access is what allows the payout to remain outside your estate.
Another question involves trustees. The trustee manages the trust, pays premiums, and ensures heirs receive proceeds according to your instructions. A responsible trustee makes the process smoother for your heirs.
Schedule a Consultation with an Estate Planning Attorney
An irrevocable life insurance trust can protect your estate from tax exposure and safeguard insurance proceeds for your heirs. If you want to know whether an ILIT fits within your estate plan, we can review your situation. Schedule a consultation with James C. Provenza & Associates, PC by calling (847) 729-3939 for estate planning and management help. As an estate planning attorney in Chicago, our team explains the process, drafts the trust, and helps you protect your legacy.
