Why Create an Irrevocable Life Insurance Trust or an ILIT….?

Tax Savings…. People buy life insurance for many reasons, life insurance has unique features not found in other financial solutions. Why not reduce your family’s estate taxes by placing your life insurance policy you already own into a trust? Why would one make this choice?

The main purpose of this technique is to remove an asset from your estate, assign the funds to loved ones, and not to pay estate tax on the amount of money in the insurance policy.

Three reasons to create a Life Insurance Trust or ILIT:

• Reduce Federal and Pennsylvania estate taxes
  When life insurance is transferred to, or owned by, the ILIT, all the money/proceeds derived from the policy at an individuals’ death are NOT part of the insured’s gross estate. The policy has been transferred to a trust. Therefore, the asset is not subject to Pennsylvania or Federal estate tax.
• You control where the money goes…. most likely to family members
  You can control how the life insurance proceeds in the ILIT are distributed. The money can be distributed immediately to one or many beneficiaries. Secondly, you can specify how and when the beneficiaries would receive distributions. Thirdly, the trustee could have discretion to the timing of the distributions, such as upon graduation, buying a new house or attaining a certain age.
• Leverage
  The ILIT is created control a life insurance policy, while the insured is alive, as well as manage the proceeds which are paid out upon the insureds death. The insured can borrow against the proceeds in the life insurance policy to purchase other assets, such as real estate. Leverage is a very powerful tool.

What’s the catch….?

The trust is Irrevocable, meaning once the trust instrument has been signed, the terms are not subject to change. Secondly, if you die within three years of signing the trust document, the amount will revert to your estate. Lastly you are required to choose a trustee, a close relative, friend or a trusted bank relationship.

The Bottom Line….

ILIT’s are a powerful tool that removes an asset from your estate, is a tremendous tax savings, allows you to leverage your assets and transfers assets to your family….The Ultimate Goal!

Written by: ||elizabeth genter, schenley president & giovanna brown, intern ||