What Is an ILIT?

Jul 14, 2015

The fact that there are a lot of rather wordy terms used in the legal field is no secret, and this is where the term “legalese” comes from. Sometimes legal devices are reduced to acronyms so that they are easier to refer to, and this certainly enters the estate planning realm.

With this in mind, we will look at the ILIT in this post.

Estate Tax Efficiency

In an estate planning context, the acronym ILIT stands for an irrevocable life insurance trust. This type of trust can be used to remove the value of your life insurance policies from your taxable estate.

Before we look at some of the specifics, we should explain the estate tax parameters. In 2014, you are exposed to the estate tax if you are transferring more than $5.34 million to anyone other than your spouse. This $5.34 million exemption is called the credit or exclusion.

In 2015 the exclusion is going up to $5.43 million, because an inflation adjustment is being added. If your estate exceeds the amount of the exclusion, you must look for avenues that provide estate tax efficiency. An ILIT can be part of the plan if you are in possession of valuable life insurance policies and you are exposed to the estate tax.

To implement this strategy, you convey the policies into the irrevocable life insurance trust. When you do this, you are removing the value of the policies from your taxable estate.

You may assume that you should name your spouse as the beneficiary of the trust, especially if your spouse was the beneficiary of the policies. However, you could go in a different direction and make the trust itself the beneficiary of the policies.

In the trust agreement you could instruct the trustee to distribute income from the trust to your spouse throughout his or her life. However, your spouse would never be the direct owner of the assets, so they would not be part of his or her taxable estate.

We should point out the fact that there is a three-year rule. If you die within three years of conveying insurance policies into the trust, the value of the policies would go back into your estate for tax purposes.

It would be possible to have the trust purchase insurance policies on your life, and under these circumstances, the three-year rule would not be applicable.

Learn More About Irrevocable Life Insurance Trusts

Our firm has prepared an in-depth report that will tell you everything that you need to know about irrevocable life insurance trusts. This report is being offered to our readers free of charge at the present time, and you can access your copy through this website.

To obtain access to the report, click this link and follow the simple instructions: Free ILIT Report.

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