The Purpose of a Life Insurance Trust

For many families, the value of a life insurance policy represents a significant portion of their overall estate. Of course, you want to ensure that the vast majority of your policy’s death benefits go to your beneficiaries after you pass away rather than to the IRS and state taxing authorities. You might also be concerned that your heirs will squander the proceeds from your policy if they are not yet mature enough to handle an inheritance on their own. An irrevocable life insurance trust (ILIT) may provide a solution to both of these concerns.

What Was an ILIT Created to Do?

An ILIT is a living trust created specifically to own, manage, and protect a life insurance policy. You can transfer your existing policy to the ILIT after the trust has been created, or you can have the ILIT purchase your policy directly. Either way, the trust will own the life insurance policy and collect the policy’s death benefits when you pass away.

Your trustee (the person or institution that you name in advance to manage the trust after your death) then distributes the proceeds to the trust’s beneficiaries according to the terms mandated in the ILIT document. The ILIT document can specify who will be the trust’s beneficiaries, how and when the beneficiaries will receive distributions from the trust, and how money in the trust will be invested.

ILIT Benefits to a Taxable Estate

For many people, keeping the policy’s death benefits from being treated as part of their taxable estate is the most important reason to establish an ILIT. To take advantage of this benefit, however, it’s best to have the ILIT purchase the policy directly. Otherwise, if you happen to die within three years of transferring the policy to an ILIT, the proceeds become part of your taxable estate. Other benefits of an ILIT can include:

• Avoiding the delays, frustration, and legal fees involved in the Probate process
• Providing immediate cash to pay estate taxes and other expenses
• Greater control over the insurance policy itself and how the policy’s benefits are used after you’re gone
• Protecting the insurance policy’s proceeds against threats such as lawsuits, creditors, and financial predators
• Providing income to the surviving spouse without the policy’s proceeds being included in his or her estate

Life insurance trusts aren’t for everyone. To learn whether you and your family would benefit from an ILIT, contact us for a consultation.

Estate Planning Attorneys Who Can Create a Life Insurance Trust

If you’re eager to ensure that it’s your beneficiaries, and not state taxing authorities, that are the recipients of your death benefits, attorneys with experience creating and implementing a Life Insurance Trust can give you great peace of mind.

The estate planning attorney at the Law Offices of Clifford M. Cohen has more than 35 years of experience and is dedicated to helping families in the DC and Maryland area with all of their elder law matters. If you’d like to speak with us today, call our offices at (202) 895-2799 for a free consultation.