Pros and Cons of Choosing an Irrevocable Life Insurance Trust
Trusts are often an important aspect of planning your estate that can be used in lieu of a will or to complement a will. An estate planning lawyer can help you set up an ILIT, which is an irrevocable trust designed primarily to contain your life insurance policy. There are both advantages and disadvantages to protecting your life insurance in this manner.
Pro: Decrease Estate Taxes
When you pass away, all of your assets and debts are added up to determine the total value of your final estate. Under normal circumstances, any life insurance payout is considered an asset and would therefore be added to that amount and would be included in determining the amount of estate taxes that are owed. Protected by an ILIT, the life insurance policy is separate from other assets and is not considered in the overall value of the estate.
Pro: Greater Control Over Asset Distribution
An irrevocable life insurance trust can provide you a great deal of control over how your heirs receive benefits. This can be useful in certain scenarios, such as when there are young people involved. The trust can, for instance, provide regular payments to children until they are older and until the structure is no longer needed. Another example is that if the decedent was divorced, a standard life insurance policy provides direct control to the ex-spouse whereas an ILIT allows the estate to maintain control over those resources.
Pro: Protect Your Heirs From Creditors
In the event that you have final expenses, creditors may be able to collect on any life insurance payout, and their right to do this varies from state to state. However, if you set up an ILIT, you do not own the policy. The trust does, and therefore, creditors would have no right to the payout regardless of the jurisdiction.
Pro: Your Life Insurance Policy Is Private
An estate becomes a public record upon your passing. Debtors will have access to this information in addition to relatives that are potentially resentful. But an ILIT keeps the details of the life insurance a private record.
Con: Setting Up an ILIT Can Be Complex
Establishing an irrevocable life insurance trust is a complex process and generally is not something that can be achieved without the assistance of an estate planning lawyer. There are also potential issues down the line, such as the three-year rule, which requires the ILIT to be evaluated upon your passing. If the ILIT is not legitimized at that time, the protection fails, and the life insurance is added to the estate.
Con: Establishing an ILIT Can Be Expensive
ILITs are relatively expensive estate structures to set up. A total cost beyond several thousand dollars is not unusual as a trust must be drafted and a trustee must be appointed. Whether that setup cost is worth it depends greatly on the specifics of the estate and other factors, such as the federal tax exemption.
Con: Federal Tax Exemption
ILITs have become more unnecessary over time. In the 1990s, the federal tax exemption was less than $1 million, and that made an ILIT a viable option for many. Currently, the exemption exceeds $11 million, and an ILIT is generally unnecessary for any estate below that threshold.
Con: An ILIT Cannot Be Changed Later
Earlier, we mentioned greater control as a pro, and this is true but after death. While alive, you are actually relinquishing control to the ILIT. Once established, an ILIT cannot be amended or otherwise modified. It also cannot be rescinded, and you cannot break the trust for a minimum period of three years or whatever the time limit established in the trust.
Legal Assistance With Irrevocable Trusts
If are interested in an irrevocable life insurance trust as a means to protect your heirs or your estate at large, the Knee Law Firm would like to help. We offer more than 60 years of combined legal experience, and you can meet with one of our experienced estate planning lawyers to determine if an ILIT is appropriate for you. To schedule a consultation, contact us online, or call our Hackensack office at 201-996-1200.