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Irrevocable Life Insurance Trusts (ILIT)

Most people are surprised to learn that proceeds from a life insurance policy count as an asset as part of your overall estate, even though the life insurance proceeds aren’t received until after your death and commonly pass right to your named beneficiary. Many policyholders believe that such proceeds will pass to beneficiaries without any estate tax implications. Unfortunately, the reality of life insurance and taxation can be harsh, as estate taxes can claim over forty percent of the value of life insurance proceeds, significantly reducing the amount planned for your heirs.

Life insurance policy proceeds are included in your taxable estate if you possess ownership or any control over the policy, known as “incidents of ownership.” This applies to various forms of insurance, including term, cash value, and employer-provided policies.

Estate tax planning attorneys can create Irrevocable Life Insurance Trusts, or ILITs, as a strategic tool for estate plans and tax planning. These trusts (ILITs) enable policyholders to bypass the tax pitfalls associated with transferring insurance policy proceeds to children or other beneficiaries. These legal entities (trusts) allow policyholders to remove the life insurance proceeds from their taxable estate, ensuring that beneficiaries receive the intended benefits without the undue burden of estate taxes.

The trusts and estates attorneys at Holm & O’Hara LLP have decades of experience working through the intricacies of irrevocable life insurance trusts and providing tailored solutions to meet the unique estate planning needs of our clients.

What Is an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust (ILIT) is a legal entity created to hold and manage life insurance policy (or policies). Once an ILIT is established, the trust becomes the owner of the policy. This structure ensures that the death benefit/proceeds of the policies owned by the trust are not included in the taxable estate of the decedent, potentially saving beneficiaries from significant estate taxes. For New Yorkers, an ILIT offers a way to provide for loved ones while also navigating the complex tax landscape.

How Does an ILIT Work?

Creating an ILIT involves transferring ownership of a life insurance policy to the trust (or purchasing a policy with the trust at the inception of the policy). The grantor, or creator of the trust, makes contributions or gifts to the trust and such funds are deployed to pay the premiums on the insurance policy (or policies) owned by the trust. Upon the grantor’s death, the trustee of the trust collects the death benefit (proceeds of the policies) and distributes such proceeds to the beneficiaries of the trust pursuant to the terms of the ILIT.

Benefits of an Irrevocable Life Insurance Trust

The benefits of establishing an ILIT are multifaceted. By removing the life insurance proceeds from the grantor’s estate, the ILIT helps reduce value of the overall taxable estate, which can be especially beneficial in New York State, where estate taxes can be significant. Additionally, the trust can provide liquidity to pay estate taxes and other expenses without having to sell off other estate assets. ILITs also offer a degree of asset protection from creditors and can be structured to ensure need based government benefits are not adversely affected by an inheritance. Finally, the terms of the trust provide the grantor with the opportunity to provide a consistent income and financial resources to the beneficiaries over time rather than distribute the proceeds in a lump sum.

When to Include an ILIT in Your Estate Plan

While life insurance proceeds are typically free from income tax, they still contribute to the overall value of your estate, which may then subject your estate to taxes upon your death. Incorporating an ILIT into your estate plan is worth considering if you anticipate that when including the value of your life insurance policy, your estate will exceed the estate tax exemption amount and thus subject it to federal or state estate taxes, or if you wish to preserve the value of your life insurance for your beneficiaries. This is particularly relevant for individuals with larger estates or those who want to provide for their heirs without increasing their tax burdens. It’s also a wise choice for those who want to ensure that specific assets are earmarked for certain purposes, such as paying estate taxes or providing for a family member with special needs.

Consult with a New York Estate Planning Attorney

At Holm & O’Hara LLP, our attorneys bring decades of experience to meet the needs of each of our estate planning clients, including the effective use of irrevocable life insurance trusts. Our approach is not just about creating documents—it’s about crafting a legacy and ensuring that your estate planning objectives are met with precision and care. Whether you need to protect your assets, minimize your tax liabilities, or ensure your loved ones are well cared for, our estate planning attorneys are here to guide you every step of the way.

We invite you to learn more about how an ILIT can fit into your estate plan and enhance the legacy you leave behind. Contact us today to schedule a consultation.

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