What is an ILIT?
An ILIT is created by the individual (the grantor) during their lifetime. It cannot be rescinded, amended, or modified after it is created. An Irrevocable Life Insurance Trust owns a life insurance policy on the grantor’s life via the transfer of ownership of an existing policy, or through the grantor’s annual contribution of cash to pay the premiums on a policy purchased by the trust.
The grantor will designate beneficiaries, usually members of their family, and they will receive the proceeds from the trust when the grantor passes away.
What does it mean to say the trust is irrevocable? Once the grantor contributes property or life insurance death benefits to the trust, they forfeit all rights to the property contained in the trust. This part is integral to accomplishing the objectives of an ILIT.
What can an ILIT do for you?
There are several objectives an ILIT can help you accomplish for your estate:
- Meeting the liquidity/cash needs of the grantor’s estate
- Avoiding estate taxes on the policy’s death benefit proceeds
- Providing additional income to beneficiaries after estate taxes/expenses have been paid
- Protecting assets from creditors
How does it work?
When you die, the trust is designed to receive a payment equal to the policy coverage amount. Since the trust’s ownership of the policy is irrevocable, the proceeds are not considered your property. This means that they do not fall into your estate and they avoid potential estate taxation.
You must set up your trust with direction on how and to whom payments may be made. You can even direct that the trust pay out cash to cover costs such as funeral costs, probate, taxes, final medical expenses, and debts.
Extra Tips on How to Use Your ILIT
An irrevocable life insurance trust is often used to set aside assets for certain purposes, such as paying estate taxes, because these assets themselves are not taxable. In order to do this, the assets must be moved into the life insurance trust at least three years before they can be used. Some people will create new policies in their spouse’s names to circumvent this requirement.
If the insured has beneficiaries who are either minors or adults with reckless spending habits or demonstrated patterns of alcohol/substance abuse, an ILIT can help minimize irresponsible behavior. You can also appoint a trustee to supervise the trust and distribute the assets according to the grantor’s wishes.
The ILIT will also provide a level of asset protection for the beneficiaries if they were to become caught up in future litigation. Since ILITs are not “owned” by the beneficiaries, it makes it difficult for courts to link the assets to the beneficiaries, therefore making them nearly impossible for creditors for access.
How Can You Leverage Your ILIT?
This is a real example of how you can leverage your ILIT to grow your wealth for your retirement!
- A 63-year-old male with a standard life insurance underwriting health rating from a highly rated carrier is interested in an ILIT.
- He is a single filer with two children.
- He has a net worth of $16MM and his annual income is $477,000.
- The ILIT life insurance five-pay annual premium for five years is only $200,000.
- He is guaranteed a tax-free death benefit of $3,000,000.
- At age 83, the cash value of his life insurance policy would be $2,277,968. This means that the tax-free death benefit leverage is 3X!
- This tax-free death benefit will pay most or all of the estate taxes that will be owed on the estate that are above $11,580,000.
- He will also have access to the cash value of his policy should something change and he needs to access the cash tax-free.
- If our example client were to live to age 95, the cash value of his policy would be $5,312,923 and the tax-free death benefit will be $5,366,053. This is a tax-free benefit that is 5 TIMES the original total premium paid!
An irrevocable life insurance trust can be an important part of any estate plan. They can help your beneficiaries avoid estate taxes and provide many other benefits to your loved ones. If you have not begun an estate plan of your own, we encourage you to give us a call at (770) 685-1777 or visit activewealth.com/consult/ to schedule a FREE consultation. An estate plan is an important part of your financial plan and we want to help you create it. If you have an estate plan, but are interested in exploring an irrevocable life insurance trust, you can reach us at (770) 685-1777 or visit activewealth.com/consult/ to schedule a consultation. We’re glad to be a part of planning your financial future.
You can also join on our webinar on estate planning: https://event.webinarjam.com/channel/estate101.
Investment advisory services offered through Brookstone Capital Management LLC (BCM), a registered investment advisor. BCM and Active Wealth Management are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. The example used is for illustrative purposes only and does not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Active Wealth Management is a private wealth management firm located in Atlanta, GA. Our team is passionate about educating clients in order to empower them to invest and retire successfully and we believe in managing our client’s assets actively. Active Wealth Management works with three primary groups of people; pre-retirees, retirees, and business owners.
Active Wealth Management is led by our Founder and President, Ford Stokes, and by our Senior Vice President, Brandy Seats. They aim to help clients understand their current financial situation, analyze their current portfolio, and develop a customized financial plan to accomplish their goals. If you would like more information about the firm, please visit our website, https://activewealth.com, or call our office at (770) 685-1777. You will not be passed off to another advisor. You will meet with either Ford or Brandy. You can schedule directly into their calendars at https://activewealth.com/consult/.