A life insurance policy could provide a way for beneficiaries to pay for many expenses after someone passes away. The claim may address taxes or cover other debts left when the policyholder dies. Many people will purchase a life insurance policy as part of their estate planning steps. For some, opting for an irrevocable life insurance trust (ILIT) might be preferable.
The value of the ILIT
With an ILIT, the policyholder does not take ownership of the policy. Instead, the policy is held in an established trust and managed by a trustee. Giving away ownership to the trust might take certain benefits away from the purchaser, but there are other attributes making an ILIT valuable to them.
Namely, a trust allows the estate planner greater control of the assets placed inside it. Sometimes, the beneficiaries may be irresponsible with their money. If the policy is part of a trust, better management of the money and controlled payout allocations are possible.
If the trust mandates payments of all debts, the recipient could become unencumbered by a current debt situation. Receiving a percentage of a large sum of money per year could prevent the recipient from going through all their money quickly.
Tax issues
The threshold to avoid federal estate taxes is high, but there are situations where an ILIT could helo the estate’s tax situation. A policy placed inside an irrevocable trust would not count towards the taxable amount of the estate. Estate plans might involve using the policy’s payout to cover estate taxes.
An irrevocable life insurance trust requires deliberate planning. Those putting the work into devising a trust could help their beneficiaries immensely with their actions.
