For most people, an estate plan has more than just a single objective – that being the distribution of your assets after death. While that may be the primary objective of your estate plan, you will likely want to achieve additional goals as well by creating a comprehensive estate plan. To accomplish those goals you will likely incorporate a number of documents into your estate plan and use numerous strategies. One common addition to an estate plan is an irrevocable life insurance trust, or ILIT.
An ILIT is a specific purpose trust. Like all other trusts an ILIT requires you to appoint a trustee, designate at least one beneficiary, and transfer assets into the trust to be held by the trust. In the case of an ILIT, the asset you transfer into the trust is a life insurance policy taken out on you. It may be an existing policy or you may direct the trust to purchase a policy.
An ILIT may be funded or unfunded. Unfunded ILITs are more common; however, you have both options. In a funded ILIT you will also transfer enough assets into the trust to pay the premiums on the life insurance policy as they become due. In an unfunded ILIT you will need to make yearly gifts to the trust which are then used to pay the premiums. This option is popular because the yearly gifts can often be used to further decrease your estate assets. Either way, the trustee of the trust is responsible for paying the policy premiums to ensure that the policy remains in effect.
When you die, the policy proceeds are considered liquid assets which are immediately available to help pay for the cost of your funeral and burial or to help surviving family members financially. This is one of the most significant benefits to an ILIT –the liquidity of the assets. In addition, the proceeds from the policy are not included in your taxable estate, meaning that they are not taxed for purposes of gift and estate purposes.
Make sure you talk to your estate planning attorney if you think and ILIT might make a good addition to your estate plan.
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