An Irrevocable Life Insurance Trust (ILIT) is a trust that, once created, generally cannot be altered. Typically, an ILIT is used by depositing life insurance benefits or property, into a trust. An ILIT works as an alternative to a more typical life insurance plan and the trust is paid upon the grantor’s passing. So, why would someone choose an ILIT over a more traditional life insurance plan?
There are a few reasons why an ILIT can be a more attractive alternative:
- Money in an ILIT isn’t considered to be a part of the grantor’s estate. This enables the trustee to receive the full sum of the trust upon the grantor’s death, without a cut being taken for estate tax.
- The trust isn’t considered to legally belong to its beneficiaries. This is useful if the beneficiaries face potential legal action as this can keep their assets safe.
- A third party can serve as the trustee. This is useful for an individual whose true beneficiaries are minors or otherwise may not be fully capable of handling the financial burden of a sudden surplus of funds. The third party can then pay from the trust according to a payment plan, or can delay payments until those true beneficiaries have reached a certain age.