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An irrevocable life insurance trust (ILIT) is a particular type of trust designed to protect and control term and permanent life insurance policies while the insured person is still alive. ILITs have several advantages, including providing tax-free death benefits and safeguarding the insurance policy from creditors and divorce.

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If you’re considering setting up an irrevocable trust for your heirs, seek the help of a qualified estate planning attorney with Pennington Law, PLLC. We can provide valuable guidance and advice as we establish the ILIT to your wishes. We can also help you select a suitable trustee, prepare trust documents, and integrate your ILIT into a broader estate plan.

Our estate planning attorneys are standing by to protect your wishes and safeguard your future. Contact us today for a free ILIT consultation with an irrevocable life insurance trusts lawyer in West Valley Arizona.

Who Should Consider an ILIT?

Now that you know what an ILIT is, you might wonder whether it’s right for you. You should consider establishing an ILIT if:

  • You Have a Considerable Net Worth – Those who have at least $5 million and hold permanent life insurance policies stand to benefit most from an ILIT.
  • You Own a Business – If most of your assets are tied up in your business, an ILIT can prevent your heirs from having to sell part or all of your company to pay estate taxes.
  • You Work in a Field That Makes You Vulnerable to Lawsuits – Doctors, attorneys, and other professionals who might be the target of a lawsuit can protect their assets from creditors and judgments by placing them in an irrevocable trust.

The best way to decide is to talk to an experienced Arizona estate planning attorney.

What Is an Irrevocable Life Insurance Trust (ILIT)?

You can use an ILIT to manage life insurance policies for all your designated beneficiaries. For example, your attorney can set up the ILIT to provide income and capital gains tax benefits and asset protection from creditors and estate taxes.

This type of trust is irrevocable, meaning that once the grantor creates it, they cannot change or revoke it. The trust holds the life insurance policy, pays any premiums due, and distributes the death benefit to beneficiaries according to its terms.

An ILIT can also accomplish several other estate planning objectives, such as providing for disabled individuals, ensuring that family members can pay off debts, and efficiently passing assets to beneficiaries. Transferring life insurance policy ownership to the trust removes the proceeds from the grantor’s estate for tax purposes.

Because the grantor cannot revoke an ILIT, it is important to consider the long-term implications of such a trust and set it up correctly. Those looking for guidance on estate planning should consider establishing an ILIT to protect their assets and provide for their beneficiaries.

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Pros and Cons of an Irrevocable Life Insurance Trust

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Irrevocable life insurance trusts offer many benefits for those looking to protect their assets and provide for their families after their deaths. Among the major advantages of ILITs, they:

  • Keep Estate Taxes to a Minimum – The benefit from a life insurance policy you hold in your own name will count toward your total estate upon your death. However, if an ILIT holds your life insurance policy, its benefit will not, meaning it is not subject to state and federal taxes.
  • Protect Government Benefits – An ILIT can help you protect any beneficiaries who are receiving government aid like Medicaid or Social Security disability income. You can fully control how the trust distributes benefits so they won’t interfere with your beneficiary’s eligibility for other government assistance.
  • Protect Your Assets from Lawsuits – An ILIT can separate your assets from your estate, protecting them from any legal judgments against you. Under this protection, a court cannot freeze, seize, or garnish them.
  • Shield Your Assets from Creditors – An ILIT also provides protection against creditor claims. Although creditors may garnish your bank accounts or place a lien on your property, they cannot touch anything under your ILIT even after your death.
  • Provide Estate Tax Advantage – Depending on the value of your assets, the IRS may take a sizable portion of your estate in taxes, preventing them from passing to your beneficiaries. An ILIT can be a valuable tool to prevent or reduce estate taxes.

The main disadvantage of an ILIT is that, because it is irrevocable, you cannot make any changes once it is finalized. Put another way, you cannot direct how the trustee will manage the trust, which could present problems if you later lose faith in the trustee’s judgment. However, some ILITs include provisions that allow certain changes to be made with the beneficiary’s permission.

Another potential downside of an ILIT is that it can be complicated to set up and administer without a lawyer’s help. If you are considering placing your life insurance in an irrevocable trust, consult an experienced estate planning lawyer before doing so.

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How to Set Up an Irrevocable Life Insurance Trust

How to Set Up an Irrevocable Life Insurance Trust

Setting up an ILIT is not necessarily a simple process, but it’s worth the effort to ensure that your loved ones are cared for should something unpredictable happen.

To do this, follow these steps:

Consult with an Experienced AttorneySpeak with a lawyer who handles estate planning and can help you establish ILIT. Your attorney can guide you through the entire process and set up an ILIT tailored to your particular needs.

Appoint a Trustee – This person is responsible for managing and administering the trust and ensuring that your beneficiaries receive their distributions per the trust’s terms. The trustee can be a family member, friend, corporate trustee, or someone else you choose.

Purchase Insurance – You must purchase life insurance policies to fund the trust. The insurance will be irrevocable and owned by the trust. Shopping around for the best policies that meet your needs and budget is important. Your lawyer can help you find the right one for you.

Draft Trust Documents – Once you’ve decided who should administer the trust, who it should benefit, and what should fund it, your lawyer will draft an ILIT to meet your wishes. Once completed, all parties involved should review and sign the document.

Set up Funding – You will need to fund the trust with assets so that it can pay the insurance policy’s premiums. This can include cash, investments, real estate, or other items of value.

File Tax Returns – An ILIT is a separate tax-paying entity, so the trustee will need to file annual tax returns. Your attorney can draft the trust to comply with all IRS requirements.

Once you complete these steps, your ILIT should be up and running. Remember, because you have limited ability to change an irrevocable trust after the fact, it’s crucial to work with an experienced lawyer who can spot and avoid potential pitfalls.


Why Must the Trust Be Irrevocable?

By making a trust irrevocable, you cede all incidents of ownership over it, which means it is not part of your taxable estate on death. In other words, an ILIT must be irrevocable to avoid paying taxes on your life insurance premiums. If your insurance policy does not benefit an irrevocable trust, its payout could trigger federal and state taxes upon your death, depending on the value of your insurance benefits and other assets.


Differences Between Revocable Trusts vs. Irrevocable Trusts

By understanding the differences between revocable trusts vs. irrevocable trusts, you can make more informed decisions about your estate planning needs. Although there are many different types of trusts, they all fall into one of two categories:

  • An Irrevocable Trust – You cannot change this type of trust except in limited circumstances with the permission of your beneficiaries. However, this type of trust offers more protections, such as those against creditors and taxes.
  • A Revocable Trust – You can change this type of trust at any time. However, a revocable trust does not offer any tax protections because it remains under your control.

You should carefully consider all relevant factors when evaluating whether to have a revocable or an irrevocable trust. Consulting with a qualified West Valley Arizona estate planning attorney planner can help you make the best decision.

Contact a West Valley Arizona Irrevocable Life Insurance Trusts Lawyer Today

If your estate is large enough to trigger federal tax laws, an ILIT could protect the interests of your beneficiaries. The estate planning lawyers with Pennington Law, PLLC, are well-versed in estate and trust law and can create instruments tailored to meet your unique goals. If necessary, we can even create more than one trust in the case where not all your beneficiaries are mature enough to manage a substantial inheritance.

We know that the right trust or combination of trusts can bring you peace of mind knowing your loved ones are cared for, and we want to help you achieve your retirement and legacy goals. Contact us today to speak with a West Valley Arizona irrevocable life insurance trusts attorney.

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