3 Reasons an Irrevocable Life Insurance Trust Can Benefit Your Estate Plan

Many people set up irrevocable life insurance trusts for different reasons. It’s an estate planning tool that can help you achieve various goals. Ultimately, you should always have complete control over your assets, especially when the federal government imposes a tax on you restate.

Here are the three reasons having an irrevocable life insurance trust is beneficial:

Reason #1 – Minimize Your Tax Liability

The death benefit of a life insurance policy will typically count as part of your gross estate when you pass away. However, an irrevocable trust that owns the life insurance policy ensures that the proceeds won’t count towards your gross estate. In other words, the money is non-taxable.

If you draft your irrevocable life insurance policy a certain way, you can also use the proceed to pay off debts and expenses. You can even set aside gifts and transfer them into the trust. This helps reduce your tax liability as well.

Gift taxes can also be pretty costly. You can gift anyone (heirs, beneficiaries, close relatives) up to $16,000 a year per person to avoid them. There’s no legal limit on the number of gifts you can make.

Crummey powers can also offset gift taxes. They allow beneficiaries to withdraw contributions within a set time limit. You can also transfer assets from life insurance policies into trusts that qualify for the annual gift tax exclusion.

Reason #2 – Government Benefits

An irrevocable life insurance trust can also help beneficiaries qualify for government aid. This includes programs such as Medicaid, Social Security, and food assistance. If someone meets a specified income threshold, they won’t be eligible to receive aid. Trustees will then have to be mindful of how they distribute funds to beneficiaries.

Reason #3 – Asset Management

Irrevocable life insurance trusts not only allow you to protect your assets but also provide you with leverage when making distributions. After you pass away, creditors will likely solicit your estate for repayment. However, an irrevocable trust will ensure that the assets go to your beneficiaries directly.

You also get to determine how you want to disperse assets and inheritances to your beneficiaries. You can set up distribution plans, which enable you to incentivize beneficiaries to reach certain milestones. Some examples include graduating from college, buying a home, or having a child.

Are There Any Disadvantages to an Irrevocable Trust?

The only significant disadvantage is that once you establish the terms of the trust, no changes can be made once it’s finalized. You no longer own the assets that you place into the trust, which means that you likely can’t recover them in the future. Only in rare cases can you dissolve an irrevocable trust.

Bottom Line

An irrevocable life insurance trust will significantly bolster your estate plan by allowing you to manage and protect your assets. It’s a powerful tool that you can also use to prevent your estate from decreasing in value. You can even reduce your tax liability and set aside enough money for beneficiaries.

Related: Debunking the Top 5 Estate Planning Myths