ILIT Useful for Anything Else Besides Keeping Insurance Proceeds Out of the Estate?
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ILIT Useful in Many Ways
An Irrevocable Life Insurance Trust or ILIT is created to own and control a term or permanent life insurance policy or policies while the insured is alive. ILIT is useful to manage and distribute the proceeds that are paid out upon the insured’s death. The parties in an ILIT are the grantor, trustees, and beneficiaries. An ILIT can be used to minimize estate taxes, avoid gift taxes, protect government benefits, protect assets, for distribution control, legacy planning, and various tax considerations.
ILIT Useful for Valuation
Another benefit of an ILIT is to place the cash value and death benefit of the life insurance policy beyond the reach of lawsuits and claims against the insured.
If the purpose of the insurance is to replace the income that would be lost upon the death of the insured, the ILIT provides a viable tool to fully protect those funds. By placing the death proceeds in a properly designed ILIT, the proceeds can be placed out of the reach of a beneficiary’s creditors. Thus, if the beneficiary is sued, suffers a business failure or is the cause of a terrible accident for which the beneficiary is responsible, the funds held by the ILIT are protected from those creditors, yet can be used to provide for all of the beneficiary’s needs. If the beneficiary is married or might marry someday, the insurance proceeds can be protected from the spouse of the beneficiary in the event of divorce or upon the death of the beneficiary.
If the purpose of the insurance is to replace wealth, the same protections can be designed into the ILIT. Wealth replacement ILITs are many times used in conjunction with a charitable remainder trust (CRT) to replace the amount passing to the charity at the end of the term of the charitable remainder trust. We explore CRTs in much greater detail in Chapter 9 of this book, but we’ll provide a brief summary of the strategy here as it relates to the use of an ILIT.
A charitable remainder trust offers great advantage to the trustmaker, but at the end of its term (usually when the trustmaker dies), the trust proceeds pass to a charity. This effectively disinherits the trustmaker’s beneficiaries; at least from that portion of the estate. By purchasing a life insurance policy on the life of the trustmaker, however, and holding ownership of that policy in an ILIT, the beneficiaries can still enjoy a full inheritance .The insurance can be purchased in an amount equal to the value of the property passing to the charity at the end of the term of the CRT, thus replacing the funds going to charity for the beneficiaries, estate tax free.
ILITs can also be used in conjunction with buy-sell agreements to protect the ownership of a business in the event of the death of the owner. The insurance on the life of the business owner is owned by the ILIT. At the owner’s death, the ILIT purchases his or her ownership interest in the company with the life insurance death proceeds received from the insurance company.
Another use for the ILIT is to enable business owners to equalize their estates between those children who are active in the business and those who are not. The insurance proceeds in the ILIT can be left to the non-involved children, while the business is passed to those children who have been active in the business, and have demonstrated a desire to own the business in the future.