How to Transfer Existing Insurance to an ILIT
An Irrevocable Life Insurance Trust (ILIT) removes life insurance death benefits from the decedent's estate. Removing the death benefit from the estate can lower estate taxes, passing a greater portion of the estate to the heirs. Life insurance used to fund an ILIT can be either new or existing policies. ILITs are complex estate planning vehicles. Working with complex vehicles such as these requires expertise in estate and tax law. The reduction in estate taxation can be substantial for large estates.
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Things You'll Need
- Estate attorney
- Tax advisor
- Irrevocable Life Insurance Trust
- Change of ownership forms
Instructions
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Review your existing Irrevocable Life Insurance Trust with an estate attorney and tax advisor. Determine any gift tax consequences of transferring cash value of the existing policy into the ILIT. Determine how future premium payments will be made to the policy; beneficiaries should have the right to remove the funds used for premiums.
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Obtain the proper form to change the ownership of the policy or to assign it to the ILIT. Your insurance company can provide you with the specific form they require.
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Complete the transfer of ownership form. Make certain the spelling and punctuation of the ILIT name is exactly the same as contained in the actual trust document.
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Review the completed transfer paperwork with your estate attorney and tax advisor.
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Submit the completed paperwork, along with a complete copy of the ILIT, to your insurance company. The copy of the ILIT must be complete so the insurance company will know how the death proceeds are to be distributed or managed upon the death of the insured.
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Tips & Warnings
Only use permanent life insurance to fund an Irrevocable Life Insurance Trust. Term insurance is temporary and may not remain in force until the death of the insured.
An Irrevocable Life Insurance Trust cannot be undone. Consider all options before making this decision.
The transfer of an existing life insurance policy into an ILIT is subject to a three year look-back period. Depending on circumstances, such as age and health of the insured, amount of cash value in the policy and any other factors identified by your estate planning team, you may want to consider having the trustee of the ILIT purchase a new policy on the insured to avoid the look-back period.
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