What is an Irrevocable Life Insurance Trust (ILIT)?

An ILIT, also known as a irrevocable life insurance trust, is a type of trust that is used to hold a life insurance policy. An ILIT is a popular estate planning tool because it can help individuals and families manage their assets and plan for the future.

There are several benefits to using an ILIT as part of your estate plan, here are a few:

• Tax efficiency: When a life insurance policy is held in an ILIT, the premiums paid on the policy are typically not considered gifts for tax purposes. This can help individuals who are subject to the federal gift tax avoid paying taxes on the premiums they pay.
• Asset protection: An ILIT is an irrevocable trust, which means that once it is created, it cannot be changed or dissolved without the consent of the beneficiaries. This ensures that the trust assets, in this case the life insurance policy, are protected and cannot be seized by creditors or other claimants.
• Control over your assets: When you create an ILIT, you can specify how you want the policy to be managed and who you want to receive the death benefit when you pass away. This can provide important peace of mind for you and your loved ones and can help ensure that your assets are managed and distributed according to your wishes.
• Flexibility: An ILIT can be a flexible estate planning tool that can be tailored to meet your individual needs and goals. For example, you can specify how you want the trust assets to be managed and invested, and you can specify when and how your beneficiaries will receive the trust assets.

While there are several benefits to using an ILIT as part of your estate plan, there are also some potential drawbacks to consider. Some of the potential drawbacks of using an ILIT include:

• Lack of control: Once you create an ILIT, you will no longer have control over the trust assets, including the life insurance policy that is held in the trust. This can be difficult for some individuals who are used to managing their own assets and making their own decisions.
• Cost: Setting up an ILIT can be a complex and time-consuming process, and it typically requires the help of an experienced estate planning attorney. This can add to the overall cost of creating an ILIT and can be a deterrent for some individuals.
• Limited ability to make changes: Because an ILIT is an irrevocable trust, it cannot be changed or dissolved without the consent of the beneficiaries. This means that once you create an ILIT, you will not be able to make changes to the trust, even if your circumstances or goals change.
• Potential tax drawbacks: While using an ILIT can provide tax benefits for some individuals, it can also have potential tax drawbacks in certain situations. For example, if the value of the life insurance policy held in the ILIT grows significantly over time, the trust may be subject to estate taxes when the policy is paid out.

Overall, while using an ILIT can provide several benefits for estate planning, it’s important to carefully consider the potential drawbacks and discuss them with an experienced estate planning attorney before deciding whether an ILIT is the right choice for your situation.