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Maximize your estate plan with an irrevocable life insurance trust

On Behalf of | Jan 19, 2023 | ESTATE PLANNING - Trusts

As part of a tax-minimizing strategy for your Illinois estate, you can set up an irrevocable life insurance trust (ILIT) to protect your assets. You can provide your beneficiaries with certain protections while reducing the value of your taxable estate by purchasing and transferring ownership of a life insurance policy to the trust.

What is an ILIT?

An ILIT is an estate planning tool that offers additional ways to manage assets for the benefit of your beneficiaries and to minimize estate taxes. The trust holds a life insurance policy, and your beneficiaries receive the policy’s death benefit through the trust.

The irrevocable nature of the trust means that once you create it, you, as the grantor, can not change or revoke it. Additionally, the assets placed in the irrevocable trust are held in the name of the trust. In other words, you are no longer the life insurance policy owner.

Estate and gift tax changes

An ILIT offers several estate planning benefits. The current estate and gift tax exemptions are $12,060,000 per individual and $24.12 million per married couple. You can also give up to $16,000 annually to any number of recipients you want without incurring any gift tax liability.

However, the existing guidelines will sunset in 2025 and return to previous lower levels unless Congress intervenes. Depending on the assets in your estate, lower estate and gift tax limits could hike up your estate taxes and provide less money for your heirs. An ILIT offers a tax-efficient way to move your life insurance death benefit out of the estate to lower your tax liability.

How an ILIT benefits your estate

An ILIT allows you to distribute your assets within the trust to beneficiaries separately from the distribution plans for your estate. The ILIT is tax-efficient because the amount of money paid for life insurance premiums and the resulting death benefit is removed from your estate, reducing your estate’s taxable value.

Holding life insurance inside an ILIT can also protect the death benefit amount from creditors. Both you and your beneficiaries will receive this protection.

You can also use an ILIT to provide money for continuing care of a dependent with special needs. As the money does not come from your estate, it does not interfere with any benefits the individual receives from the federal government.