Trusts come in a variety of “flavors,” with different types of trusts serving different purposes in estate, tax, and charitable planning strategies. Irrevocable Life Insurance Trusts, often called an “ILITs” for short, are not as common as revocable living trusts, and the two types of trusts should not be confused as there are important differences between them.

Here’s a quick overview to help you better understand how ILITs work and who should consider using them.

What is an ILIT, and How Does it Work?

When you create an ILIT, you are creating a separate legal entity to hold assets. You are the trust’s “grantor,” also sometimes called the “settlor” or “trustor.” The ILIT trust agreement you create specifies who is in charge of managing the trust (the “trustee”), and to whom and how trust assets should pass when you die (the “beneficiaries.”)

One of the most important things to understand about ILITs is that they are irrevocable, which means once you create the agreement and transfer assets into it, you are giving up all control over those assets. With a revocable trust, the grantor typically serves as the initial trustee until his or her death or incapacity. However, with an irrevocable trust, that’s not the case. You cannot change the beneficiaries of an ILIT either, so it’s important to make sure you are comfortable with your decisions.

Who Can Benefit from Using ILITs in Their Estate Planning?

ILITs do not make sense for everyone. However, they can be extremely useful for people who have potential federal and/or state estate tax burdens. That’s because assets inside a properly-structured ILIT will pass outside the grantor’s estate. So, ILITs can lower the potential tax burden for your estate and heirs.

Why “Fund” an ILIT Using Life Insurance?

While you can “fund” your ILIT with nearly any type of asset, it is most common to use permanent life insurance. When you do so, the ILIT is the owner and the beneficiary of the policy, with you as the named insured. When you die, the death benefit proceeds are paid directly into the ILIT and distributed according to the trust agreement’s terms.

In addition to passing outside of your taxable estate, ILITs funded with life insurance can also create a powerful legacy, generating cash (life insurance proceeds) that can be readily available to pay your final expenses, valid debts, estate administration costs, and taxes. This means your loved ones won’t have to worry about not having sufficient liquid assets to meet these obligations.

Note that this blog post is intended to provide just a high-level overview of ILITs. Trust law and estate tax planning are complex; always consult with your attorney and tax professionals to find out how using ILITs or other advanced planning strategies might impact your estate before deciding on a course of action.

Are you ready to learn more about the role of life insurance in estate, gift, and tax planning? At Christopher Ferguson Insurance in Tyngsboro, we’ll help you evaluate your insurance needs, goals, and coverage options so you can make informed decisions. To learn more, contact Chris online today or call 617-386-6572.