Irrevocable trusts are a strategic planning method for transferring assets outside of probate, most with favorable tax strategies. Irrevocable life insurance trusts are among the trust tools you can adopt for other specific reasons.
They shield the assets you wish your beneficiaries to receive so creditors cannot attach them, and they provide an income for special needs loved ones without compromising their eligibility for federal or state disability benefits. To explore whether this estate planning tool is right for your family, contact a Phoenix irrevocable life insurance trust lawyer now.
How Do Irrevocable Life Insurance Trusts (ILITs) Work?
As the grantor, the person who establishes and funds the irrevocable life insurance trust, you do not manage the assets you deposit because the trust now owns them, separating them from your taxable estate. An independent trustee must be named to oversee it. Our local trusts attorneys offer this service, but you can enlist a trusted loved one or close friend.
ILITs purchase life insurance policies on grantors. Trustees pay the annual insurance premiums, and the beneficiaries receive the assets after the grantor dies. Beneficiaries must agree to any modifications the trustee proposes. The policy remans active as long as the trustee pays the premiums, and upon the grantor’s death, the death benefit is paid to the trust, from which the trustee distributes the proceeds to the beneficiaries. Our Phoenix lawyers can explain how an irrevocable life insurance trust applies in your situation.
How to Pay Life Insurance Premiums
Annual life insurance premiums can be paid or the irrevocable trust can be funded by using the annual gift tax exclusion the federal government allows. You can designate up to the maximum amount, or double for a married couple, to each beneficiary and you will not have to pay taxes on the money.
Grantors deposit the allocation into the trust and a Crummey notice alerts beneficiaries the funds are deposited for them; but they then decline to withdraw the money, leaving it to the trustee to pay annual life insurance premiums.
Established life insurance policies can be moved to an ILIT, but if the grantor passes away within three years of making the transfer, the Internal Revenue Service (IRS) will require that the proceeds count toward the taxable estate. Irrevocable life insurance trusts operate in precise ways for your benefit, and our attorneys can explain further during a confidential consultation.
Protecting Special Needs Loved Ones with an ILIT
You may have loved ones who are disabled and depend on Social Security Disability checks and Medicaid for their healthcare. These programs are income-limited, and a person can lose benefits when they exceed the modest caps. By making a disabled loved one a beneficiary, an ILIT can be structured to enhance their lives but safeguard their benefits.
Estate Tax Exemptions vs. Life Insurance Trust
The federal estate tax exemption allows your estate to deduct a certain amount when determining the federal estate tax to pay after your death. However, if you are of high net worth, any amount more than the exemption can be taxed up to 40 percent. One way to circumvent these higher estate taxes is to create an ILIT. Our Phoenix irrevocable life insurance trust lawyers can discuss how an ILIT works in your situation.
Learn More About Irrevocable Life Insurance Trusts by Speaking With Our Phoenix Attorneys
Many productive estate planning tools are available for you to preserve your assets for the next generations. You can circumvent probate with some, and gain tax advantages with others. An irrevocable life insurance trust in Phoenix allows you to do both.
The process must be structured properly, and you will need to appoint a trustee to manage the trust, pay insurance premiums, and distribute the assets to your beneficiaries upon your death. Our estate planning lawyers take cases across Arizona and we are ready to assist you.
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