“I am not a lawyer and I don’t play one on TV. If you are thinking about making any legal or financial decisions, you should ALWAYS consult a qualified attorney and your personal financial advisor. Having expert advice will help you avoid making mistakes from which you can’t recover.” George Politarhos.

By George Politarhos

As a financial professional, I know that my clients looking to create generational wealth often seek vehicles to help their beneficiaries with greater asset protection, tax advantages, and legal benefits.

One option I discuss with these clients is to meet with an attorney and explore whether forming an irrevocable life insurance trust (ILIT) makes sense in their estate planning.

An ILIT is a living trust specifically designed to contain a term or permanent life insurance policy, such as an indexed universal life or whole life policy. The person who establishes this trust and legally transfers control of the assets to a trustee is called the grantor. An ILIT grantor cannot be the trustee because the ILIT is irrevocable, meaning that the grantor funds it, then gives up their rights to amend or dissolve it. You can choose anyone you want to act as the trustee, including your spouse, attorney, adult child, or financial institution.

By giving away ownership and control of the policy in an ILIT, you give up your ability to access the cash value or change your beneficiaries while you are still alive. However, doing so provides a tax advantage because the IRS and some states will exclude the policy’s proceeds when calculating your estate’s value for tax purposes.

While it’s true that the estate tax threshold is pretty high right now ($12,060,000 in 2022), there are indications that it’s likely to be lowered in the future. While it is also true that typically, only higher-value estates need to worry about federal estate taxes, individual states may tax estates on a much lower threshold.

Beverly Hills-based attorney and asset protection specialist Keila Nakasaka says that ILITs offer other attractive advantages for high-net-worth individuals.

“Properly designed, an ILIT can help provide liquidity to pay estate taxes and other expenses and help you avoid gift tax consequences. The key is having your ILIT drafted by an attorney who specializes in trusts and asset protection,” says Nakasaka.

Other benefits of an ILIT include:

Protection for physically or mentally disabled beneficiaries. Proceeds from an insurance policy owned by an ILIT may be one way to protect special needs beneficiaries. Your ILIT’s trustee can monitor and control distributions so they won’t hamper the beneficiary’s ability to qualify for government benefits such as Medicaid or Social Security disability income. (SSI)

Asset protection. Many people I speak with believe that life insurance proceeds are “sacred” and off-limits to creditors or lawsuits. Unfortunately, that is true in only a handful of places. Many states, such as California, provide poor domestic asset protection, exposing much of your life insurance policy’s cash value to creditor actions. If you live in a state without solid domestic asset protection, an ILIT could help.

Control of the proceeds. Instead of giving out a lump sum that a beneficiary might spend irresponsibly, the ILIT’s trustee can decide specifically when beneficiaries will get their distributions. You could, for example, have the trustee issue checks on milestones such as their birthday, college graduation, marriage, or a child’s birth.

Legacy planning. Since proceeds from the policy in an ILIT are excluded from the grantor’s estate, multiple generations of the family can enjoy the trust’s assets free from generation-skipping transfer taxes and estate taxes.

There are numerous advantages to having an ILIT, especially for those with larger, more valuable estates. ILITs must be meticulously designed and executed to ensure they give you and your beneficiaries the maximum amount of protection. You should know that you will give up control and ownership of assets in an ILIT. For this reason, you’ll want to partner with an attorney specializing in these types of trusts. You will also need a life insurance specialist to advise you on the correct policy type for funding the trust.

 

Bottom line: For those with more valuable estates or who want to use cash value life insurance to create a legacy, an ILIT may be one solution. If you’d like to discover more about ILITs and the insurance that funds them, call my office and set up an appointment.