An irrevocable life insurance trust (ILIT) is a trust created to hold life insurance policies, designed to protect the policy’s death benefit from estate taxes. An ILIT is a common tool used by estate planners to help clients avoid estate taxes and pass on wealth to their heirs.
Federal Estate Tax Parameters
When a person dies, their estate may be subject to federal estate taxes if the total value of their assets exceeds a certain threshold, currently set at $12.92 million. Life insurance death benefits can be included in the calculation of estate taxes, which can be a significant burden on the heirs who receive the policy proceeds.
How an ILIT Works
By creating an ILIT, the policy owner transfers ownership of the policy to the trust, effectively removing it from their estate for tax purposes. The trust becomes the policy owner and beneficiary, and the policy’s death benefit is paid directly to the trust upon the insured’s death. The trust then distributes the proceeds to the trust beneficiaries according to the terms of the trust.
Liquidity
An ILIT can also be used to provide liquidity to an estate. If significant assets are tied up in illiquid commodities such as real estate or a business, the estate may not have enough liquid assets to pay the contact form to send a message.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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