What Are the Benefits of an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust is an estate planning tool created for the purpose of holding a life insurance policy. An individual can set up a trust, place a life insurance policy in it and name a beneficiary for the policy. Using this type of trust can provide several estate planning benefits.

Avoid Estate Taxes

One of the primary benefits of using an irrevocable life insurance trusts is to avoid estate taxes. With this system, you put the life insurance policy in the possession of the trust. This means you are no longer the owner of it. When you die, the policy will pay benefits to the beneficiary, but those benefits will not be coming from your estate. This means that the value of the benefit will not count towards the estate tax exemption that is allowed by the Internal Revenue Service.

Reduce Taxable Estate

Another benefit of using this type of trust is that you can reduce your taxable estate. When you make gifts to the irrevocable insurance trust for the purpose of paying the premiums on the policy, you reduce your estate. By reducing your estate, you can potentially get under the exemption that is allowed by the IRS for estate taxes. For example, if the exemption were $1 million, if the size of your estate is less than $1 million, your beneficiaries will not have to pay any estate taxes.

Pay Estate Taxes

If your estate is very large, and you will not be able to get it below the exemption level for estate taxes, using an irrevocable life insurance trust can give your beneficiaries money to pay the estate taxes. If you did not use this trust, the value of the life insurance policy would count towards the estate and increase the taxes. By keeping it separate, you can roughly calculate how much estate taxes will be and then buy a policy that will provide enough money to pay them.

Set Up Limits

When you use a life insurance trust, you can also set up rules and limits on when the money will be distributed to your beneficiaries. While you may want to leave a sizable amount of money to your beneficiaries, you may not want them to have access to it all at once. When you use a trust, you can specify when the money will be distributed to your heirs. This can help protect the money from being wasted or spent frivolously.