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How an irrevocable life insurance trust works

On Behalf of | May 31, 2022 | blog, Trusts |

Many people in Connecticut think wills are the only way to handle assets. However, trusts are another option to manage assets and ensure they get transferred to recipients. A common type of trust is an irrevocable life insurance trust.

Overview of trusts

Trusts are legal documents that hold assets for the grantor, or creator, who determines the recipients, or the beneficiaries. A grantor may also assign a trustee to manage the assets for them upon death or if they become incapacitated.

Trusts are either revocable, which means they can be changed, or irrevocable, meaning they can’t be changed. A grantor can place most anything into a trust, including real estate, vehicles, homes (including homes that are mortgaged), insurance, and bank accounts. Trusts are beneficial because they save heirs time from lengthy probate, but taxes are paid on generated income.

Irrevocable life insurance trusts

An irrevocable life insurance trust is funded with a term or permanent life insurance policy during the grantor’s lifetime. The death benefits pass to the beneficiary and may also include second-to-die, which issues the benefit after the second grantor passes.

Two benefits of an ILIT are the death benefits do not get included in the estate taxes or could help pay other taxes. However, if the grantor dies within three years of transferring an existing policy, the benefits are transferred to the estate. A way to avoid this is purchasing a new policy through the trust, which makes it the original owner.

ILITs are ideal to protect assets for a minor beneficiary or issue funds in increments for beneficiaries not responsible with money. An ILIT can provide incremental income to a surviving spouse, often called a Spousal Lifetime Access Trust. However, since an ILIT is irrevocable, the only way to dissolve it would be to stop paying the premiums.

An ILIT is a valuable estate planning tool regardless of the grantor’s income. However, they should seek financial and legal advice to determine if it suits them.

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