Irrevocable Life Insurance Trusts

Irrevocable life insurance trusts are essential estate planning tools that allow flexibility when transferring wealth to surviving family members. They can also give an estate planner more control over his or her life insurance policy and how the money from the policy will be paid to the beneficiary. Additional advantages include minimizing estate taxes and protecting assets against creditors.

Setting up an irrevocable life insurance trust can be a challenging process without the help of an experienced attorney. After carefully evaluating your goals and needs, attorney Christopher Heritage can help you understand your options and guide you through the process. Contact Heritage Legal, PC, today to schedule a case evaluation and learn more about whether an irrevocable life insurance trust could be right for you and your estate plan.

What Is an Irrevocable Life Insurance Trust (ILIT)?

Individuals with sizable life insurance policies and large estates can benefit from creating an irrevocable life insurance trust. Life insurance trusts are created during a person's lifetime, meaning you cannot alter the terms or revoke the trust. When creating the trust, you will transfer your life insurance policy ownership to the trust. The trust will own and control one or more permanent life insurance policies.

This type of trust can own individual life insurance policies and second-to-die insurance policies. With second-to-die insurance policies, two lives are insured, and a death benefit is paid out when the second individual passes away. Second-to-die insurance policies are common among spouses who would like to transfer the assets of their insurance policy to their surviving child or children.

Protecting Your Beneficiaries with an ILIT

When you pass away, the trustees you appoint will have the right to manage and distribute the insurance policy's proceeds according to your wishes outlined in the trust agreement. Assets in the trust are not subject to probate. Your beneficiaries will not have to go through the probate process to receive the death benefit. Instead, when you pass away, the insurance policy will pay the life insurance death benefit to the trust, the beneficiary named in the life insurance policy. After the proceeds of the life insurance policy have been paid into the trust, the trustee will distribute the proceeds according to your wishes as outlined in the trust agreement.

Setting Up an Irrevocable Life Insurance Trust in California

The first step to creating an irrevocable life insurance trust is working with an attorney to create the legal document that will act as the trust agreement and set up the trust. You will have control over the terms of the trust agreement. After establishing the trust, you will need to transfer your existing life insurance policy into the trust. Alternatively, you can have the trust purchase a new life insurance policy. You also need to transfer assets into the trust for the purpose of paying for the life insurance policy premiums on your behalf.

Crummey Powers and Avoiding the Gift Tax

When you create the trust, you will need to transfer assets into the trust to cover the premium payments on your life insurance policy. The money you transfer into the trust is considered a gift by the Internal Revenue Service (IRS). Consequently, these assets are subject to gift taxes. However, you can avoid gift taxes by adding “Crummey powers” to your trust as a provision that allows trust beneficiaries to withdraw gifts you make to the trust for a specific period. Up to $16,000 in annual gifts can be protected from gift taxes. Working with an experienced attorney can help you include these provisions in your trust agreement.

The Benefits of Setting up an ILIT

Estate planners who are high net worth individuals and own significant assets. For 2022, the estate tax exemption is $12.06 million per individual and will increase to $12.92 million in 2023. If you are subjected to the estate tax, catering an ILIT could save your estate money as the amount of the life insurance policy will not be included as part of your taxable estate.

Business owners can benefit from creating an ILIT. When a business owner dies, the business could struggle with enough cash to cover estate taxes and other related expenses. Creating an irrevocable life insurance trust can provide survivors the immediate cash needed to cover trust administration expenses and help the business remain profitable.

Finally, if your estate includes significant assets that can be evenly distributed between your beneficiaries, ILIT can help you equalize inheritances for your beneficiaries. For example, suppose you have a family business or real estate property. You may have three adult children and need help distributing your assets among your children evenly. In this scenario, one child could receive the family business, the other child could receive the proceeds from the irrevocable life insurance trust, and the third child could receive the company.

Potential Disadvantages of Setting up an ILIT

Some disadvantages to creating an irrevocable life insurance trust include the cost of working with an attorney and potentially filing gift tax returns. Additionally, irrevocable life insurance trusts cannot be revoked or changed, meaning they are less flexible than other types of trust. When you create this type of life insurance trust, the IRS will count your death benefits as part of your state taxes if you pass away within three years of transferring the policy into the trust. Finally, there is a risk that you will contribute more to the trust than the federal limit, which could negate tax benefits. Working with an attorney can help you understand and avoid these pitfalls.

Schedule a Free Case Evaluation with a Skilled Irrevocable Life Insurance Trust Attorney

An irrevocable life insurance trust can protect your assets and surviving family. Attorney Christopher Heritage has extensive knowledge of California’s trust and estate laws. He uses his experience to help clients understand the advantages and disadvantages of setting up trusts, including irrevocable life insurance trusts. If you’re in the Palm Springs area, don’t hesitate to contact Heritage Legal, PC, to schedule an initial consultation.

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