How Does an Irrevocable Life Insurance Trust ILIT Benefit You?

What is Irrevocable Life Insurance Trust?

 

Irrevocable life insurance trust or ILIT is a place to hold your insurance proceeds. People generally set up ILIT to protect their insurance proceeds from falling into their estate should they pass away.

 

When setting up an ILIT, you may decide on who are the beneficiaries and the terms of how the life insurance proceeds should be distributed. You may appoint a trustee to manage the proceeds for you as well. Once it is set up, it becomes non-revocable and you no longer have any rights on it.

 

How Does an Irrevocable Life Insurance Trust Benefit You?

 

A properly designed ILIT would bring various benefits to you. Below are some of its benefits:

  • Heirs inherit more of the insurance proceeds. This is the primary purpose people setting up an ILIT. Upon setting up an ILIT, your insurance proceeds are no longer owned by you, thus not subject to estate taxes. Your heirs will basically inherit more of the proceeds. There is one condition need to be fulfilled: you need to survive at least 3 years from the set up date of the ILIT. Otherwise, the policy will still form a part of your estate.

  • Reduce overall estate taxes. Generally, after setting up an ILIT, it reduces your estate income. From there, your estate tax liability decreases.

  • Reduce insurance coverage needed. As an ILIT reduces your tax liability by reducing your estate income, your needs on life insurance coverage will also be lowered.

  • Creditor proof. An ILIT ensures all your life insurance proceeds do not fall into the hands of the creditors. This is important especially when your total debts are larger than total estate. Your creditors can never access to your insurance proceeds in the ILIT.

  • Protect beneficiary. When you set up an ILIT, the benefits of your disabled heir who is currently under government aid will be protected and not affected.

Needless to say, it is always important to include life insurance in your life plans, without which means your heirs may suffer from your sudden dismiss. However, buying life insurance alone is not enough as you need a more proper planning - setting up an irrevocable life insurance trust - to ensure your heirs get what you plan to give them.

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