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The benefits of an irrevocable life insurance trust

On Behalf of | Aug 3, 2021 | Estate Planning |

An irrevocable life insurance trust can be a great estate planning tool for Connecticut residents. Often referred to as an ILIT, these instruments act as both the owner and beneficiary of large life insurance policies. Using an ILIT can help high net-worth individuals and their families avoid estate taxes.

Understanding the problem

As of 2021, Connecticut’s estate tax applies to estates of over $7.1 million. Without an ILIT, a life insurance payout may be taxed in the state. High net-worth people also need to be aware of the federal estate tax, which applies to estates over $11.7 million. Between these two taxes, families can find themselves hit hard by expenses after a painful loss.

Using an ILIT may be one way of helping your loved ones avoid excessive taxes after you pass. It will hold the payout from a life insurance policy in trust for your family. Utilizing trusts as part of your estate planning process can help your beneficiaries receive funds faster and avoid some proceedings in probate court.

The nuts and bolts of an ILIT

Often, people set up an ILIT and then the trust itself applies for the life insurance policy. However, if you already have a policy, you may be able to transfer it to an ILIT. There are some limitations with this, though. For example, if the trustor dies within three years of the transfer, their estate may lose the benefits associated with the ILIT. With an ILIT, the trust must be the entity that pays the policy premiums. So it’s important to make gifts to the trust that are large enough to do that.

ILITs should be actively managed by a trustee. For large estates, it’s wise to use a professional to manage an ILIT. This could include a trust company, an accountant or a lawyer. However, some people will name a family member such as a spouse or adult child as trustee or co-trustee. In such cases, they may be limited as to how they may distribute the money.