Did you know a Florida Irrevocable Life Insurance Trust is a type of trust established during life that is specifically designed to own a life insurance policy, and the requisite death benefits, after you pass away? The main benefit to an Irrevocable Life Insurance Trust, also referred to as an ILIT, is tax avoidance, but other benefits can apply based on your unique circumstances. We know you may not have heard of this form of estate planning yet and want to share five benefits with you here in our blog as we discuss using this type of trust agreement within your estate plan.
1. It May Minimize Estate Taxes. Since the trust owns the insurance policy, it is not technically part of your estate and therefore the life insurance proceeds may not be subject to federal and state estate taxes. If properly established, however, an ILIT can provide liquidity to pay for applicable estate taxes and any debts or expenses tied to your estate. You can also transfer assets into the ILIT to reduce the value of your estate tax liability.
2. Assist with Asset Protection Planning. An ILIT can protect against creditors of either the life insurance policy creator or the policy beneficiary. Rules and regulations regarding the relevant asset protections can depend on circumstances, such as when the trust agreement was created, but working with your estate planning attorney can help you determine if this is a planning tool that can help you secure your legacy and reach your goals.
3. Planning to Avoid Gift Taxes. An ILIT can be arranged to take advantage of the “gift tax exclusion.” This means that you can give away up to the annual exclusion amount each year to any person of your choosing without a gift penalty. This could include, but not be limited to, an adult child, grandchild, or anyone you want, without paying a stiff gift tax. Further, your spouse may also utilize this same benefit. A properly drafted ILIT can avoid gift tax consequences because contributions by the life insurance policy holder are considered gifts to the beneficiaries.
4. Accessing Government Benefits. Parents or grandparents worried about leaving life insurance benefits to loved ones with special needs that may exceed income limits for vital government programs, like Medicaid and Social Security disability, can use an ILIT to shield them. By leaving the life insurance death benefits to the trust, the special needs family member never actually owns the funds, and a handpicked ILIT trustee can make sure they are not in jeopardy of receiving inheritance distributions in conflict with program rules.
5. Planning for Distributions. An ILIT allows for the distribution of trust assets to occur according to the policy holder’s predetermined wishes, and his or her selected trustee is tasked with managing the payouts to beneficiaries accordingly. Choose wisely, however, as your trustee will play an important role after your passing.
We know that using this type of trust in your estate planning may be a new concept for you. We know, for many of our clients, until they understand the long-term value of this form of trust, it may seem overwhelming. Know that we are here for you. If you or someone you know would like more information from an experienced Florida estate planning attorney about an Irrevocable Life Insurance Trust, do not wait to contact our law practice today.