What Are Irrevocable Life Insurance Trusts (ILITs) In Arlington County, Virginia
An irrevocable life insurance trust is set up to control a life insurance policy. Since it is irrevocable, it typically cannot be changed once it has been created. When the individual who purchased the life insurance policy passes away, it pays out into the trust, which then works to distribute the money to beneficiaries.
One potential benefit of using an irrevocable life insurance trust is that it removes the insurance from the taxable estate. The trust, not the grantor – the person who created the trust – owns the life insurance policy. There can be some significant benefits when considering issues like estate taxes or eligibility for government benefits.
Here at NOVA Estate Planning, PLLC, our dedicated estate planning attorneys can help you explore all of your options in Arlington County, Virginia. Our lawyers are known for unmatched customer service, attention to detail and a track record of success.
Key Benefits Of Irrevocable Life Insurance Trusts
Estate tax reductions are one of the main benefits of an irrevocable life insurance trust. If the value of the policy would increase a person’s estate significantly, they may have to pay much more in taxes on their combined assets. But by putting the life insurance policy into the trust, it reduces the total value of their estate and keeps more of the money in the family.
An irrevocable life insurance trust can also be useful for asset protection. Since the trust owns policy and not the individual, this can protect assets from creditors, lawsuits, gift taxes and more.
How Do Irrevocable Life Insurance Trusts Work?
The grantor sets up the life insurance trust and is the person around whom the life insurance policy is focused. They then choose beneficiaries who can receive distributions from the trust, along with trustees who are in charge of facilitating this process. The trustee manages the irrevocable life insurance trust, while the beneficiaries get distributions as part of their inheritance.
One important thing to note about setting up an ILIT is that the grantor wants to avoid the appearance of ownership when it comes to that specific life insurance policy. They should not be making premium payments on their own. Instead, they can set up a checking account that holds the funds, and the checking account will also be owned by the trust. This way, premiums can still be paid, but it’s clear that the grantor has no personal ownership of the policy.
What Are The Potential Drawbacks Of ILITs?
One potential drawback is simply that this type of trust is irrevocable. It often cannot be changed, and even in the rare situations where it is changed, the cooperation of all parties – the grantor and the beneficiaries – is required. This makes it an inflexible option that is difficult to alter if life circumstances change in the future.
There can also be some complexity issues for those who are setting up the trust, which is why it can help to work with an experienced law firm. For instance, they may need to consider the three-year rule used by the IRS. If someone already has an existing life insurance policy and they then transfer that policy into an irrevocable life insurance trust, they are doing so to reduce the value of their own estate. But if they pass away within three years, the policy is still included in their estate. As such, it’s very important to plan well in advance and not to put something like this off until the last minute.
Who Should Consider ILITs?
The ideal candidate for an ILIT is someone who already has a large estate and is trying to reduce its value – either to avoid gift taxes, to preserve access to benefits or to reduce estate taxes overall.
Someone who counts on government benefits could also be a candidate for this type of trust. They want to keep assets out of their own name so that they will pass a means test and remain eligible for the benefits they are depending on. Failing the means test could mean that they have to spend assets down in order to qualify, but a trust is one way to reduce the estate without having to spend the funds directly.
There are some cases when alternatives may be better. For instance, if a person’s estate doesn’t contain enough assets to trigger significant estate taxes in the first place, using an irrevocable life insurance trust may be needlessly complex. They are taking a risk by creating an irrevocable trust that cannot be changed. But for those who genuinely need to reduce the value of their estate, this could be a very important tool.
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If you’d like to learn more about irrevocable life insurance trusts or all of your other estate planning options, just call 703-794-5630 or use the online contact form to set up an initial consultation today.