How ILITs work

To create an ILIT, the grantor transfers ownership of a life insurance policy to the trust. The trust then becomes the owner and beneficiary of the policy. The grantor can also transfer cash to the trust to pay the premiums on the policy.

When the grantor dies, the life insurance proceeds are paid to the trust. The trustee then distributes the proceeds to the beneficiaries of the trust according to the terms of the trust agreement.

How ILITs help avoid estate tax

One of the main benefits of an ILIT is that it can help to avoid estate tax. When the grantor dies, the life insurance proceeds are not included in their taxable estate. This is because the grantor is no longer the owner of the policy.

To avoid estate tax, the grantor must survive for at least three years after transferring the policy to the trust. If the grantor dies within three years of transferring the policy to the trust, the proceeds will be included in their taxable estate.

Why ILITs are useful no matter what the estate tax lifetime credit is

The estate tax lifetime credit is the amount of money that an individual can transfer during their lifetime or at death without having to pay estate tax. The current estate tax lifetime credit is $12.92 million per individual ($25.84 million per married couple).

Even if your estate is worth less than the estate tax lifetime credit, an ILIT can still be useful. For example, an ILIT can be used to:

• Provide for minor children or disabled beneficiaries
• Protect assets from creditors
• Provide privacy and confidentiality for your estate

How ILITs will become very valuable as the estate tax lifetime credit sunsets in 2026

The estate tax lifetime credit is scheduled to sunset to $5 million per individual ($10 million per married couple) in 2026. This means that more estates will be subject to estate tax in 2026 and beyond.

If you are concerned about estate tax, you should consider creating an ILIT. An ILIT can help you to avoid estate tax, even if your estate is worth more than the estate tax lifetime credit.

Conclusion

ILITs can be a valuable estate planning tool for individuals of all wealth levels. If you are considering creating an ILIT, you should consult with an experienced estate planning attorney.

Additional benefits of ILITs

In addition to the benefits mentioned above, ILITs can also offer the following advantages:

• Asset protection: ILITs can help to protect assets from creditors and lawsuits.
• Privacy and confidentiality: ILITs are private trusts, which means that the terms of the trust and the identities of the beneficiaries are not publicly available.
• Flexibility: ILITs can be structured to meet the specific needs of the grantor and their beneficiaries. For example, the grantor can specify how and when the trust assets are distributed to the beneficiaries.

How to create an ILIT

To create an ILIT, you will need to work with an experienced estate planning attorney. The attorney can help you to draft the trust agreement and transfer the life insurance policy to the trust.

Once the ILIT is created, you will need to appoint a trustee. The trustee is responsible for managing the trust assets and distributing them to the beneficiaries according to the terms of the trust agreement.

Conclusion

ILITs can be a valuable estate planning tool for individuals of all wealth levels. If you are considering creating an ILIT, you should consult with an experienced estate planning attorney.