IRREVOCABLE LIFE INSURANCE TRUST (ILIT)
In Florida, estate planning is one of the best ways to protect assets and ease the burden on your loved ones after your death. One useful estate planning tool is an Irrevocable Life Insurance Trust (ILIT), which allows a Florida resident to qualify for Medicaid, avoid estate taxes upon death, and protect the insurance policy payout from creditors.
An ILIT is created to own a life insurance policy, generally on the life of creator (the "grantor") of the trust, for the benefit of the grantor's spouse, children or other loved ones (the "beneficiary" of the trust). Ownership of an existing life insurance policy can be transferred into the ILIT after it has been created, or the ILIT can be formed to purchase a new policy on the life of the grantor.
Understand the Benefits and Drawbacks
Because an ILIT is irrevocable, the trust cannot easily be modified, amended or terminated. In addition, the grantor does not control the trust itself and, therefore, must appoint a trustworthy individual to serve as trustee of the trust. Likewise, the grantor does not own the insurance policy, but rather he ILIT serves as the owner.
To gain the most benefit, an ILIT should be designated as the insurance policy's primary beneficiary and the grantor's spouse, children or other loved one is named the primary beneficiaries of the trust. When the grantor passes away, the life insurance death benefits are distributed to the trust and held for the benefit of the trust's beneficiary. If the trust's beneficiary is the grantor's surviving spouse, the spouse can elect to receive the insurance proceeds in incremental payments rather than one lump sum in order to avoid death taxes on the spouse's estate after the spouse's death.
One complication of using an ILIT is that if the grantor dies within three (3) years of transferring an existing life insurance policy into the ILIT, the IRS will include the death proceeds in the grantor's estate for estate tax purposes. However, this can be avoided by having the ILIT purchase a life insurance policy on the grantor's life, then funding the trust with sufficient money over the course of the grantor's life in order to pay the yearly insurance premiums.
Another complication is potential gift tax implications. Because the ILIT is irrevocable, any cash transfers made to the trust (such as for yearly premium payments) are considered taxable gifts. However, if the trust is created and administered properly, transfers in an amount up to the yearly gift tax exclusion ($15,000 in 2019) will be free from the federal gift tax.
Don't Go It Alone
Generally, the benefits of an ILIT outweigh the potential complications. As with any other legal document, using a DIY or pre-printed irrevocable life insurance trust is risky and you should always consult with an estate planning attorney to ensure your specific goals and all legal requirements are met.
If you have any questions about creating an irrevocable life insurance trust in Florida, or about any other estate planning tools, please contact me today!