An irrevocable life insurance trust, or ILIT, allows you to invest in a life insurance policy and use a trustee to handle your New York estate. The terms must be irrevocable or unchangeable, and an agreement must be drafted between the grantor and the trustee. There are many considerations to make when investing in a life insurance trust.
The major features of an ILIT
An irrevocable life insurance trust is the management of your life insurance funds during your lifetime. Its irrevocable status means that the terms and conditions of your trust cannot be changed at any time.
Avoiding estate taxes is a major reason to draft a trust. As the grantor, you have more control over the use and distribution of your tax-free death benefits. You have the immediate cash to cover estate taxes and living costs. In addition, your benefits are protected in case of a divorce or legal action from a creditor. An irrevocable life insurance trust also allows you to avoid going through probate. Your beneficiaries can withdraw payments with no gift tax penalties.
However, the main disadvantages include strict restrictions. An irrevocable trust’s terms cannot be modified after it’s created. The grantor must fully understand the trust before the estate planning is completed.
Knowing your options
The irrevocable life insurance trust protects the functions of a life insurance policy. A trust advisor will recommend ways to avoid gift taxes, death taxes, and goods and services taxes made to beneficiaries in the future. It’s important to consider the complexity of taxation and many other issues when estate planning with an irrevocable life insurance trust.