Advantages of the Irrevocable Life Insurance Trust

The primary purpose of an irrevocable life insurance trust (ILIT) is to prevent life insurance proceeds from appearing in the insured owner’s equity assets. Therefore, when the ILIT testamentary document is drawn up, it must be ensured that the insured does not keep or own any life insurance whose mention appears in it. In addition, the insured must not have any power over the ILIT or its trustee that results in the life insurance policy or ILIT being included in the insured owner’s estate for tax purposes.

The ILIT grants several other advantages to the owner of the farm. Some of them are described below.

Minimizing the Tax Consequences of the Three-Year Rule: Under certain circumstances, a married ILIT grantor can minimize the payment of estate taxes associated with their estate assets. These circumstances include the case where a married grantor, who has assigned a life insurance policy to the ILIT, dies within three years of the assignment. In such a case, the policy is included in the grantor’s estate. In addition, the trustee may withhold or pay the proceeds of the life insurance in such a way that it qualifies for the spousal estate tax deduction.

If the marital deduction trust is a general power of appointment under section 2056(b)(5) of the ILIT rules, the following is true. The surviving spouse may then be given the right to withdraw the principal amount of the insurance proceeds and use it to make gifts to the descendants of the deceased owner.

Similarly, a QTIP trustee, who is an independent trustee, could be given the power to make discretionary distributions of principal to the surviving spouse, who could then also make similar gifts.

However, under section 2056(b)(7) of the ILIT rules, even the surviving spouse cannot be granted the power to designate the QTIP estate to someone other than the spouse. In other words, this means that there is no reference to the QTIP trustee making discretionary distributions so that the surviving spouse can make gifts. This is because such an authority vested in the trustee would violate the aforementioned restriction. However, the surviving spouse may be granted a five for five annual withdrawal right on the QTIP trust.

Another advantage of the ILIT is that it essentially reduces the size of your estate income and therefore your gross general estate tax liability. You can reduce your insurance coverage needs so that your estate tax liability is reduced. It will also help protect the cash value of the proceeds from your life insurance policy from going into the hands of creditors. Another important benefit of an ILIT is that it helps you control exactly when, why, and how your beneficiaries receive the proceeds from your policy in the event of your death.

Finally, another important advantage of an irrevocable life insurance trust is that it protects the benefits of a beneficiary of insurance proceeds that receives government assistance.