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Is An Irrevocable Life Insurance Trust Beneficial For You?

People purchase life insurance policies to provide financial protection to their spouse and children in case they die. The proceeds are usually not subject to income tax. However, they are included in a decedent’s gross estate. This means that most of the policy proceeds can be subject to federal and state estate taxes. For example, if you have a $5,000,000 life insurance policy, your spouse and children will only receive around $3,000,000 once estate taxes are paid. The goal of an irrevocable life insurance trust (“ILIT”) is to protect the proceeds of a policy from being taxed. Based in Brevard County, the experienced estate planning attorneys of Goldman, Monaghan, Thakkar & Bettin, P.A. can create an ILIT to protect the beneficiaries of a life insurance policy.

How is an Irrevocable Life Insurance Trust Established in Florida?

An ILIT is a contract between a grantor (also known as a settlor) and a trustee to administer an insurance contract for the benefit of certain specified people. Once you create an ILIT, you cannot amend, rescind, or modify it. You cannot later reclaim what you contribute to the trust, and you cannot borrow against the value of the policy or change the beneficiary or the terms of the trust. While you can stop giving funds to pay annual premiums, you cannot get back what was already paid to the trust. However, if the trust is structured appropriately, the death benefits paid to the trust will not be included in your estate and can also be given to your surviving spouse without being included in his or her taxable estate. Appropriately drafted, the ILIT can also avoid gift tax liability.

If you want to establish an insurance trust, you will need to undergo medical examination procedures to make sure you are insurable. An attorney will then draft the insurance trust, which will be signed by you and the trustee. An insurance application should not be filed until you have made an initial gift to the trust to cover the first life insurance premium, you have opened a checking account in the trust’s name, and you have notified beneficiaries that you are gifting the trust and that they have rights of withdrawal. Once the period for withdrawals has lapsed, you can apply for life insurance and pay the premium, signing the application as the insurance owner. The ILIT is designated as primary beneficiary of the policy.

You then transfer ownership of the life insurance policy to the ILIT’s trustee. You will no longer have any ownership over the policy, so it is important to choose a reliable trustee. You cannot be the trustee, or the government will assume you have an “incident of ownership.” Beneficiaries should also not be trustees. It is common to use a corporate fiduciary, a trusted professional adviser, or a family member who is not a beneficiary.

The ILIT will also be designated as the primary beneficiary of your life insurance policies. Upon your death, the proceeds from the policy are deposited into the ILIT and typically held in trust for your spouse’s benefit. They will be passed to your children after his or her death. Why wouldn’t people simply give ownership of the policy to the beneficiary before they die to avoid estate taxes? Under Internal Revenue Code Section 2035, a decedent who owns or has incidents of ownership on an existing life insurance policy three years before his or her death will still have the proceeds of the life insurance policy included in his or her estate. This stops deathbed transfers. There are ways to transfer an existing policy to the ILIT while avoiding this three-year rule, but there are risks that an attorney can assess to determine whether these techniques are advisable in your case.

Contact a Cocoa Attorney to Discuss Will and Trust Issues

If you want to protect the beneficiaries of your life insurance policy, an experienced attorney can help you draft an irrevocable life insurance trust. Serving clients in Cocoa as well as the surrounding communities, the lawyers of Goldman, Monaghan, Thakkar & Bettin, P.A. can help you with matters related to wills and trusts, no matter how complicated your situation may seem. Contact us at 321-353-7625 or via our online form.