The Irrevocable Insurance Trust


 

Many people don't realize that the ENTIRE proceeds of life insurance is included in your taxable estate when you die.

 

You may have consulted with an attorney, CPA, or financial planner who has advised you to set up an Irrevocable Life Insurance Trust (referred to as an "ILIT" ) to be the owner of your insurance to exclude the insurance from your taxable estate.  

 

If you have a substantial amount of life insurance (and the value of all of your assets, including the insurance, is over $1 million), the ILIT would be a good option to consider for both married and unmarried individuals. This type of trust allows you to exclude the amount of the insurance from your taxable estate, effectively passing the insurance proceeds tax free to your intended beneficiaries.  

 

HOW IT WORKS: The Irrevocable Trust would be the owner of the insurance policy and also the beneficiary.  If your 1st beneficiary is your spouse, then at your death the proceeds would be held in this Irrevocable Trust, and the surviving spouse would have the use of the money during his or her lifetime, and then at his/her death the Trust would pass to your children or other beneficiaries (outright or remaining in trust until specified ages).  If you are unmarried, then at your death the Trust would either pass the money outright to your beneficiaries, or continue in trust until specified ages. 

 

Requirements: The ILIT, with all its estate tax benefits, has certain requirements which must be met in order to succeed at excluding the insurance from your estate, as follows: 

  • Obtain a separate tax i.d. number for the trust
  • Open up a separate bank account for the trust, out of which premiums would be paid
  • File simple annual federal and MA income tax returns (usually not required if no or little interested earned)
  • Notify the beneficiaries of their rights under the trust (called a "Crummey" notice letter, typically can be done once, at the onset)
  • Fill out the necessary forms to change the owner and beneficiary of the policies