In what cases should I consider using an irrevocable life insurance trust?

If you find that the other existing settlement options are not suitable for your situation, you can consider having the policy proceeds paid to a trustee. This can be the trust department of a commercial bank or another institution.

Typically, the use of an irrevocable life insurance trust (ILIT) is resorted to in special situations, such as the following:

• If the beneficiaries are people, such as minors, who don't have the legal or mental capacity to deal with the proceeds or manage their financial affairs;
• If the amount of insurance is considerably high;
• If there is a need to periodically change the amounts paid by the beneficiary, according to the beneficiary's needs and desires.

As the trustee is someone who you entrust your property to, you should choose your trustee with utmost care. The trustee automatically becomes a fiduciary and is thus obligated to act in the beneficiaries' best interest.

Things to Keep in Mind with an Irrevocable Life Insurance Trust (ILIT)

• The trust is irrevocable. When you transfer your life insurance policy into a trust, you become the grantor, and you lose all rights as a policyholder.
• If you die within three years of transferring your life insurance into an irrevocable life insurance trust, the policy will be subject to estate taxes.
• The more complex the situation, the higher the attorney fees. The drawing up of a trust can cost anything between $500 and $2,000.
• The irrevocable life insurance trust protects the assets of the trust from the beneficiaries' creditors.
• The grantor is given the right to control the distribution of the death proceeds through the provisions in the trust contract.
• Through the purchase of life insurance, the grantor can supplement the annual gift tax exclusion to a much larger sum.
• The insured's heirs are provided with estate liquidity on a tax-free basis.
• The heirs do not have to pay the estate taxes with the proceeds.

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