How to Create an Irrevocable Life Insurance Trust
An Irrevocable Life Insurance Trust, or ILIT, is a commonly used estate planning tool. When an individual passes away, all the assets in his taxable estate (including life insurance proceeds) are subject to estate taxes. Due to a legislative loophole there are no estate taxes for 2010. According to marketwatch.com, in 2009 estates valued at $3.5 million or less were exempt from paying estate taxes. It is expected that Congress will pass a law to make the $3.5 million per person exemption permanent. Estate tax rates can reach up to 55% of the estate's value beyond the exemption amount; an ILIT is a great tool to avoid this tax.
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Instructions
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Meet with your attorney to draft a trust. It is crucial that you recieve personalized legal advice in this situation. Federal estate tax laws are constantly changing and each state has its own estate tax structure. The trust must be irrevocable, meaning that you don't own it and cannot control or change it. You can, however, pay money into it subject to gift tax and GST (generation skipping tax) limits.
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Transfer an existing insurance policy into the trust or purchase a new one. ILITs should be funded with permanent insurance such as universal life or whole life insurance. Term insurance should never be used to fund an ILIT. If you have a term policy it can typically be converted into permanent insurance for use in the ILIT.
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Meet with your insurance agent and attorney to execute the trust and transfer ownership of the insurance policy. It is important that your attorney and insurance agent agree on the proper amount and type of insurance for your needs. Transfer of existing insurance to a trust is done via a policy change of ownership form; new policies may simply be titled in the name of the trust.
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Talk with the trust executor about your wishes. The executor has complete control over the trust and should be someone you trust completely.
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Tips & Warnings
When assigning your life insurance to the ILIT be sure to leave your spouse or children as contingent beneficiaries to the trust as there is a three-year window where the trust may still be included in your taxable estate after its creation.
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