Irrevocable Life Insurance Trust Attorney

An ILIT is an irrevocable trust that can own a life insurance policy so the death benefit is generally kept outside the insured’s taxable estate for federal estate tax purposes, while providing controlled management and distribution of proceeds to beneficiaries.

An ILIT may be useful if you’re concerned about federal estate taxes, want to keep life insurance proceeds from increasing the size of your taxable estate, want structured distributions (rather than a lump sum), or want liquidity for expenses like taxes, debts, or administration costs. Many Floridians won’t need an ILIT solely for estate-tax reasons because Florida has no state estate tax and federal estate tax applies only above certain thresholds.

Creating an ILIT requires drafting a trust agreement with the help of an experienced estate planning attorney, naming a trustee, and outlining beneficiaries and terms for the life insurance policies.

You can fund an ILIT by (1) having the ILIT apply for and own a new policy, or (2) transferring an existing policy to the ILIT. If you transfer an existing policy and die within three years, the death benefit may still be included in your taxable estate under federal rules, so many plans use a new policy owned by the ILIT from the start.

If the ILIT is properly structured and administered, the life insurance proceeds are generally excluded from the insured’s federal taxable estate, which may reduce federal estate tax exposure for larger estates.

Trustees manage the ILIT, pay premiums, handle policy administration, ensure compliance with IRS rules, and distribute proceeds according to the trust terms.

An ILIT should be integrated with your overall estate plan to align with your wills, trusts, and other estate planning tools, ensuring your assets are distributed efficiently.

Because ILITs are irrevocable, changes are limited. Modifications typically require careful planning and legal guidance to avoid unintended tax consequences.

Compliance involves following IRS guidelines on gifting, ownership, and policy transfers to maintain tax advantages and avoid estate inclusion. Compliance often includes avoiding “incidents of ownership” in the policy and considering the three-year rule when transferring an existing policy to the ILIT.

Many ILITs are funded with cash gifts to the trust so the trustee can pay premiums. To potentially qualify gifts for the annual gift tax exclusion, ILITs often give beneficiaries limited withdrawal rights (commonly called Crummey powers) and the trustee typically sends written notices and keeps good records. Gift tax reporting may still be required depending on amounts and circumstances.

If the ILIT (not the insured) owns the policy and certain IRS rules are followed, the death benefit is generally not included in the insured’s federal taxable estate.

Select a trustworthy individual or professional fiduciary familiar with trust administration and estate planning to manage the ILIT responsibly.

Yes, an ILIT can hold multiple policies, allowing flexibility in funding strategies and providing additional financial security for beneficiaries.

ILITs are primarily used for tax and beneficiary-control planning. Medicaid eligibility rules are complex, and transferring assets (including certain policy interests) can create penalty periods. Some life insurance policies can be countable resources if they have cash value, depending on ownership and other factors. If Medicaid planning is a goal, your plan should be reviewed specifically for Medicaid rules and timing.

The Florida Estate Firm ensures the ILIT is drafted correctly, complies with tax laws, coordinates with your estate plan, and maximizes benefits for your beneficiaries.