Many people in Illinois may not realize that after death, their assets may be subject to a federal and/or state estate tax. Outlining the property someone wants to leave to beneficiaries is a good idea, but it is important to take into consideration the tax implications. With irrevocable life insurance trusts, taxes may be eliminated on some or all of the life insurance in the irrevocable trust and the beneficiary may receive the liquid funds needed to make the tax payments on other assets.
An irrevocable life insurance trust is at least partially funded by a life insurance policy or the proceeds of that policy. As an irrevocable estate planning document, the assets in the trust are owned by that entity and not by the decedent. Therefore, the proceeds of the trust are not included in the estate at the time of death and instead pass on to beneficiaries without further increasing the value of the decedent’s estate. According to the American Bar Association, when such a trust is put together correctly, it can more than double the amount of proceeds that are left to heirs.
Setting up such a trust often looks like this: A man creates an irrevocable life insurance trust and names an independent trustee, such as the trust department at a bank. He then designates the beneficiaries for the trust. The trustee will then apply for a life insurance policy on the man, designating the trust as the owner of the policy. The man will then gift the trust the funds to pay the life insurance premium. When the man dies, the trustee will collect the proceeds of the policy and distribute them according to the terms of the trust.
In addition to significant tax savings, there are several other benefits to putting together an irrevocable life insurance trust. For example, this method of estate planning enables someone to have a professionally managed trust. Other benefits include the following:
- A life insurance policy and proceeds may be protected from ex-spouses or creditors
- The trust will probably not have to go through probate
- A beneficiary can use the proceeds of the trust to pay estate taxes on other items
- A surviving spouse can receive income from the trust
There are a few considerations for those considering this path. As an irrevocable trust, the terms cannot be changed once it is put in place. Additionally, someone who sets up such a trust will not have any control over the life insurance policy. Lastly, it is likely that the professional management of the policy will come with a fee, which should be taken into account when doing financial planning.
Anyone with questions regarding an irrevocable life insurance trust or other estate planning tools should consult with an attorney.