What is an Irrevocable Life Insurance Trust (ILIT)?

What is an Irrevocable Life Insurance Trust (ILIT)?

An Irrevocable Life Insurance Trust (ILIT) is a legal entity created to own and control a life insurance policy for the benefit of designated beneficiaries.

Once the trust is established and the life insurance policy is transferred into it, the trust becomes the policy's owner, and the insured relinquishes control over the policy. This transfer is irrevocable, meaning the insured cannot change the terms of the trust or reclaim the policy.

Here's how an ILIT works:

Creation and Funding:
The grantor (the person creating the trust) establishes the ILIT and selects a trustee to manage it. The grantor then transfers ownership of a life insurance policy to the ILIT or funds the trust so that it can purchase a policy.

Management:
The trustee manages the trust, pays the policy premiums (usually using funds provided by the grantor), and ensures the trust's terms are followed.

Death Benefit Distribution:
Upon the grantor's death, the life insurance policy pays out the death benefit to the ILIT. Since the trust owns the policy, the proceeds are not included in the grantor's estate, which can help reduce estate taxes. The trustee then distributes the proceeds to the beneficiaries according to the terms of the trust.

Who Benefits from an ILIT?
An ILIT is particularly beneficial for high-net-worth individuals concerned about estate taxes. By excluding the life insurance proceeds from the taxable estate, an ILIT can significantly reduce or eliminate estate tax liability, preserving more wealth for heirs. Additionally, beneficiaries benefit from asset protection, as the trust shields the death benefit from creditors. ILITs are also advantageous for those who wish to control the distribution of life insurance proceeds, ensuring that minor children, financially irresponsible heirs, or beneficiaries with special needs receive the funds in a structured and protected manner. #ilit #estateplanning

Consult an estate attorney regarding your personal situation.

-Your Friends at Red Oak Financial Group