Life Insurance Trust
Sample DescriptionIf the value of your life insurance combined with your other assets will subject your estate to federal tax, you may want to consider a life insurance trust. IRC 2042 1(b)(1) - states that Life Insurance proceeds are includible in the decedent’s gross estate if the proceeds are either receivable by or for the benefit of the decedent’s estate. An ILIT is a legal means through which the benefits paid out by your life insurance company pass directly to your heirs without being taxed. Because you put your policy in trust, the payout is not considered part of your estate, so there are no taxes due on the funds when they are paid out.
A lawyer drafts an irrevocable life insurance trust. You name a trustee and name your beneficiaries. You then go shopping for a life insurance policy, and when you find one you like, you and your insurance advisor figure out the cost of the first premium. For legal reasons, you don't buy the policy yet. Instead, you place an amount of money equal to what your first premium will cost in your irrevocable life insurance trust.
Your trustee sends a written notice to your heirs stating that they have been named as beneficiaries of the trust. The notice also states that they have a given period of time, usually 30 days, to withdraw their share of the money you have deposited into the trust. Your beneficiaries should understand, well before receiving this notice, that it is to their benefit to receive their funds from your life insurance policy payout rather than to withdraw a little cash now.
Once the 30 days has passed, and none of your beneficiaries have made a claim against your trust, the trustee uses the cash gift you made to the trust to buy a life insurance plan.
You continue to make cash gifts to the trust equal to the cost of your life insurance premiums. The trustee uses this money to pay for the premiums.
At your death, your life insurance benefits are paid out to your beneficiaries. These benefits are not considered part of your estate and are therefore not taxed.
All of our ILIT clients receive detailed step-by-step instructions on how to manage their Trust, including the letters required to be signed by beneficiaries each year.