When setting up a trust, it is important for grantors to work with a Palm City irrevocable life insurance trust lawyer. An attorney familiar with trusts and estates could help you form an estate plan for the future an educate you as to how you could better protect your assets.
An irrevocable life insurance trust (ILIT) is a trust designed to hold ownership of a cash value life insurance policy.
A gift of a life insurance policy into trust (or, better yet, a policy purchased initially with trust assets) can remove the proceeds of the policy. For example, the death benefits and cash value, from the estates of both the insured and the insured’s spouse while still allowing the proceeds to be available for the insured’s spouse and children could be changed or removed. In other words, by using an ILIT, policy proceeds may be exempted from estate tax.
Another benefit to the use of an ILIT is liquidity. Following the insured’s death, the ILIT will receive cash in the form of policy proceeds. That cash can be particularly helpful in estate situations where many of the assets are illiquid in nature, like real estate and businesses.
A trusts and estates attorney may recommend the use of an ILIT where a client is insurable and may have a taxable estate. In 2019, the estate tax exemption amount is $11.4M, but that amount is set to decrease to approximately $6.5M (the exact amount has not yet been determined) in 2026.
A discretionary distributee is a beneficiary of a trust with respect to whom the trustee may exercise discretion in making distributions. This allows the trustee to use its judgment when it comes to the timing and amount of trust distributions that are made, typically following the insured’s death.
As with other types of trusts, a co-trustee might be appointed where the grantor wishes to provide some professional assistance, such as a corporate co-trustee, to an individual serving as the other co-trustee. This appointment can provide better asset protection for the individual serving as co-trustee if that individual is also a trust beneficiary. Another instance where co-trustees might be appointed is where the grantor wishes for multiple trustees to make trust decisions. For example, a grantor with 2 adult children may desire for both children to act together as co-trustees of the ILIT.
If the ILIT is properly formed and structured, the proceeds of the policy will be owned outside of the estate of the insured and the insured’s spouse, which means estate tax will not apply to those proceeds.
It is possible to fund life insurance policy premiums with gift tax annual exclusion amounts transferred to the trust (currently $15,000 per person per year), but this should be done carefully with the assistance of a skilled trusts and estates lawyer. This technique involves the use of Crummey withdrawal powers in order to provide trust beneficiaries with a present interest in the trust.
One of the most important factors to consider is the insured’s age, health, and insurability. Younger and healthier insureds will pay lower insurance premiums than will those who are older and in poor health, provided they are even insurable.
Another factor is the liquidity of the insured and/or the trust. It is important that insurance policy premiums continue to be made until the policy is paid up; otherwise, the policy may be discontinued, and the benefit of prior premiums paid is lost. Because of the numerous factors that could affect an ILIT, people need to consider speaking with a Martin County irrevocable life insurance trust lawyer.
One of the most common estate tax traps is the three-year rule and its application. The three-year rule, detailed in Section 2035(a), requires that the gift or transfer of a life insurance policy, to a trust or otherwise, within 3 years of the insured donor’s death is includible in the insured donor’s gross estate. In other words, within those 3 years of death, the transfer of a policy does not avoid estate tax consequences. A well-drafted ILIT can minimize the adverse estate tax consequences should the grantor die within the three-year period after transfer of a life insurance policy to trust.
One way to avoid application of the three-year rule is to have the trustee, using money transferred by the insured to trust, purchase the policy directly rather than the insured transferring the policy to trust. Another way is simply to work with a Palm City irrevocable life insurance trust lawyer who could help.
Before initiating an ILIT, it is wise for the grantor to go through the numbers with a trusts and estates attorney, and perhaps an accountant, to ensure that adequate liquidity will be available to pay policy premiums until the policy is paid up. A Palm City irrevocable life insurance trust lawyer could help grantors formulate a plan for the future while keeping wishes of what is to happen to an estate intact. Contact a representative today.