An irrevocable life insurance trust, commonly known as ILIT, has long been a staple of estate planning in Texas, helping families secure their financial futures. But navigating an ILIT can be difficult and intimidating, so it is important to understand this estate planning tool before using it.
Understanding ILIT and how it works
An irrevocable life insurance trust is an invaluable estate planning tool that a person can use to place their life insurance policy in a trust. The trust owns the policy and pays out to designated beneficiaries upon death. This trust is irrevocable, meaning the donor can no longer change or withdraw assets from the trust once they establish it.
Benefits of an ILIT
An ILIT allows the policyholder to separate their life insurance from their estate so that the proceeds are not subject to taxation upon their death. This provides greater flexibility for designating how your appointed trustee will distribute funds after you pass away, allowing more control over who receives those funds and when they receive them.
Additionally, having the proceeds of your life insurance policy in a trust can help protect your beneficiary receiving any government aid from disqualification. Government benefits are strictly limited to individuals with low income and limited assets; therefore, placing the proceeds in a trust can ensure they don’t exceed the set limits.
How to determine if an ILIT is right for you
First, consider your current financial situation and any anticipated changes that could affect it down the line. In particular, look at how large your estate may be upon your death and whether putting assets into a trust would help reduce potential taxes or debts owed after your passing.
Next, evaluate the person you want to benefit from your life insurance proceeds. Decide how much you want to set aside for each beneficiary and consider any potential needs they may have in the future that an ILIT can accommodate.
If an irrevocable life insurance trust seems like a great choice based on your financial needs and goals, consider setting it up. If not, you can explore alternatives, such as a revocable trust or an individual retirement account.