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Reasons to choose an irrevocable life insurance trust

On Behalf of | Aug 30, 2023 | Trusts |

Financial planning is a critical aspect of ensuring the well-being of loved ones. Life insurance plays a vital role in this process for Connecticut residents, providing a financial safety net for beneficiaries if the policyholder passes away.

One effective way to maximize the benefits of life insurance is by establishing an Irrevocable Life Insurance Trust (ILIT). These trusts offer unique advantages for estate planning and wealth preservation.

Estate tax mitigation

One of the primary purposes of an ILIT is to help reduce estate taxes. When a person passes away, their estate may be subject to federal and state estate taxes, which can significantly diminish the wealth passed on to heirs.

Life insurance proceeds are typically included in the estate’s taxable value if the policyholder has any incidents of ownership in the policy. By placing the life insurance policy within an ILIT, the trust becomes the owner and beneficiary, effectively removing the policy from the estate. This means that the insurance proceeds can be used to cover estate taxes or provide beneficiaries with a tax-free inheritance.

Creditor protection

Assets within an irrevocable trust are shielded from creditors because the grantor (the person who establishes the trust) surrenders control over the assets. This can be especially beneficial for individuals in professions with high liability risks or those facing potential financial difficulties.

Control over distribution

While an ILIT offers protection and tax advantages, it also allows the grantor to maintain control over how the insurance proceeds are distributed to beneficiaries. The trust document can specify when and how beneficiaries receive their benefits, which can be advantageous if there are concerns about how heirs will manage a large sum of money.

Avoiding probate

Assets within an ILIT bypass the probate process, which can be lengthy, costly and public. By avoiding probate, the funds can be disbursed to beneficiaries quickly and privately, sparing the family unnecessary stress during an already challenging time.

Protecting government benefits

An ILIT can be structured to protect government benefits for special needs beneficiaries. By carefully crafting the trust, a grantor can ensure that the life insurance proceeds do not disqualify a loved one from receiving important government assistance.