What is an Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust, also known by its acronym, ILIT, is a useful estate planning tool for some families. In the past, when the federal estate tax exemption was much lower, ILITs were much more common. However, they are still useful for some people who have more assets than the current federal estate tax exemption.

ILIT Mechanics

An ILIT is a type of trust that is created with the primary purpose of holding a life insurance policy. The policy is usually on the grantor’s life, but the policy is technically purchased by the trustee. The grantor gifts the life insurance premiums to the trust, and then the trust purchases the life insurance policy. The grantor is never a beneficiary of the trust. Instead, the grantor may name family members or other people as the trust beneficiaries. Upon the grantor’s death the trust cashes in the life insurance policy and then distributes the proceeds according to the trust. As a matter of course the trustee is often one of the beneficiaries, but this is not a requirement.

Benefits of an ILIT

An ILIT’s primary purpose is to reduce exposure of the grantor’s estate to the estate tax. This is done by gifting the annual gift tax exclusion amount to the trust. This takes the gifts out of the estate for the exemption calculation. When the grantor passes away, if set up properly, the life insurance proceeds will not be taxable to his or her estate. Of course, such a trust only makes sense for individuals who will either be subject to the Illinois estate tax (currently $4,000,000 exemption in 2018) or the federal estate tax (currently $11,180,000 exemption in 2018).

Crummey Notices

In order for an ILIT to escape being attributable to the grantor’s estate, the ILIT beneficiaries need to be made aware of their right to withdraw gifts to the trust before they are spent on the life insurance premiums. To notify the beneficiaries, the trustee should send what is known as a “Crummey Notice” or “Crummey Letter” to each beneficiary letting each one know they have the right to withdraw their share of the gift. If none exercise the option, then after a suitable amount of time the trustee can use the gift to pay the life insurance premium. If all goes well, the trust assets and life insurance policy will not be considered part of the grantor’s taxable estate.

Creating an ILIT

If you believe an ILIT is necessary for your family, then it is important to speak with an ILIT attorney to verify the benefit and draft the trust document. You will also need to approach a life insurance company through which your trustee will purchase the policy. Additionally, you will need to speak with your desired trustee to make sure he or she understands what is required of him or her. Once the trust is drafted then you can start gifting money to the trust to pay the insurance premiums.

Contact the Libertyville ILIT Attorneys at Johnston Tomei Lenczycki & Goldberg LLC Today

If you want an ILIT in place to protect your family from the estate tax, the ILIT lawyers at Johnston Tomei Lenczycki & Goldberg LLC can help you set up the trust, gift to the trust, and assist your trustee in purchasing a suitable life insurance policy and sending the Crummey Notices. While the process may seem daunting, for many it is worth the effort. If you want to create an ILIT, call the Libertyville lawyers at Johnston Tomei Lenczycki & Goldberg LLC today.