Irrevocable Life Insurance Trust (ILIT)
An Irrevocable Life Insurance Trust is a legal entity where someone can place life insurance with set guidelines. It is important to understand that it does not help the person with financial issues, but rather helps their family members.
This legal entity allows for many benefits to those who are creating it and it provides more options for distribution of the funds when someone passes away.
The way an ILIT works is that the person who owns it, or in most cases, this would be a parent or grandparent, places the insurance trust as the owner of the policy.
They also appoint a trustee to oversee how they want it distributed if something happens to them. The life insurance policy has a beneficiary on it and this is the person who will receive it if something happens to the owner of ILIT.
However, this does not mean that they have to be an heir or anything similar to that.
It can be anyone.
How Does an Irrevocable Life Insurance Trust Work?
An ILIT is established by a grantor (the person who establishes it) during his or her lifetime. After the grantor dies, the trust will own all the assets that were transferred into the trust.
The trustee manages the trust and makes sure that it aligns with what the grantor wants to happen. The beneficiary will receive money from the life insurance policy when it is needed, however there are specific guidelines regarding this money.
If there is a minor child who needs care, then they can have the money to pay for their care.
If there are other children who are over 18 years of age, then they can have the funds once they pass away.
This is why it is smart to appoint a trustee who will know what to do with this money on behalf of the grantor once he or she passes away. They will have to trust the trustee with their life savings.
How Do I Set Up an Irrevocable Life Insurance Trust?
Setting up an ILIT is a fairly easy process as it does not need the same details as a will or anything else.
The first step is to think about who you want to be the trustee and the beneficiary.
This should be someone you trust with your life savings and will follow through on what you have set out for this policy.
At this point, you will need to find a life insurance policy that is paid up and does not rely in any way on the death of the insured person in order for it to be valid.
The next step is to complete paperwork and create an originator or trustee document.
Before creating the trust, decide how much money you want to be in it.
Next, create a beneficiary for this policy and sign it over to the ILIT.
What Documents Do I Need To Prepare?
You will need to complete some important documents before you can start on this trust method.
These are the most important ones:
This is a form that establishes who is creating the trust and why they are doing so. It also tells them how it should be managed, if at all.
This form names the trustee and who they can act on behalf of. It also states their purpose for being a trustee and how long they will serve in this role.
This is a form that identifies the beneficiary of the life insurance policy. This person has to be someone that you trust with no strings attached because they will receive the money when it is needed, once you are deceased.
This document names a person to handle your estate if you have not already done so. For example, the name of the trustee can also be this person or someone else who has special powers regarding your assets after you die.
Who Should Have an Irrevocable Life Insurance Trust?
An Irrevocable Life Insurance Trust is helpful for those who have children that may not be financially responsible themselves, but they need money in order to pay the bills.
For example, maybe a parent has a child who is in school and they need the money to cover their tuition. They can set up an ILIT and send them the money when it is needed.
The trust is also helpful for people who may need lawyers to fight for them if they are in court. By setting up a trust, the money can be used for legal fees and anything that helps their case.
Why Would I Need One?
There are many benefits to setting up an ILIT:
If an individual has an irrevocable life insurance trust, then the assets in the trust are protected from creditors.
The beneficiary of the life insurance policy does not have to be a family member. You can name anyone as the beneficiary and this may help if you need money for legal fees or medical care.
The money inside of this trust can be dispersed in a way that you want. For example, if you have multiple children and they need the money for different reasons, then they can get it when it is needed.
If you do not want to leave your assets to your family, then this may be a good choice for you. You will not have to pay estate taxes or any other tax that is associated with leaving assets to the next of kin.
What Are the Drawbacks of Irrevocable Life Insurance Trust?
The following are some drawbacks of setting up an ILIT:
If you do not have children, then setting up this type of trust may be a waste. You can leave your assets to whomever you want or you can skip the trust all together.
When transferring assets into the trust, this may trigger an estate tax. It depends on the amount of money you are transferring and what state it is in.
This type of trust also needs to go through probate court before the beneficiary can receive their money. This can be expensive depending on where you live.
An irrevocable life insurance trust is a good choice for those who want to make sure their assets go where they want them to and not the family members.
Before you sign over your policy to the trustee, think carefully about who is going to receive that money and how it will be distributed.
If the beneficiaries are minors or irresponsible, then this type of trust can help manage money in a safe manner while also giving you control over it.
While no one wants to think about death, knowing your assets will be distributed the way you want can help ease your mind.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.