Life insurance can be an invaluable planning tool for parents of minor children. Life insurance can provide you with peace of mind knowing that your children will be provided for financially if the worst occurs, but naming beneficiaries can be tricky.
An irrevocable life insurance trust, or ILIT, is an estate planning tool that gives you maximum control over life insurance benefits, especially if you need those benefits to provide for minor children.
What is the Purpose of an ILIT?
An ILIT is a contract that creates a fiduciary relationship between a Grantor (the individual creating the trust), a Trustee (the person responsible for complying with the terms of the Trust), and the beneficiaries (those who are to receive the benefits of the trust). By setting up a trust to own a life insurance policy, you can stipulate how life insurance payments will be distributed, to whom, and when.
As a parent, you may not want your children to receive a large life insurance payment, in one lump sum, the second they turn 18. With an ILIT, you can specify, for instance, that your children receive ⅓ of the trust’s proceeds when they turn 18, another ⅓ when they graduate college, and the remainder when they turn 25. This type of structure goes a long way toward protecting the asset and ensuring your heirs manage their money wisely.
With a well-drafted trust, you can also protect any life insurance payments from your children’s future creditors, bankruptcy, divorce, or other claims that could result in the loss of the asset.
ILIT Can Yield Potential Tax Savings as Well
If you or your loved ones are at risk of state or federal inheritance taxation, an ILIT can be used as a mechanism to reduce estate taxes (keeping life insurance assets outside of your taxable estate). It’s also possible to structure an ILIT so that annual insurance premiums (paid by the trust) qualify for the yearly gift tax exclusion. To meet this requirement, your attorney will have to help you use what is known as the Crummey power - a savvy tool that can maximize tax savings even before life insurance is paid out.
My Office Can Help You Plan for Your Loved Ones’ Future
Contact my office for a free strategy session and I’ll help you determine if tools like ILITs are right for your family. Together we can ensure your loved ones are cared for, no matter what, the way you want.
If you grew up with brothers or sisters, you likely know how strong a driving force sibling rivalry can be. As a parent, do not drive a wedge between your children by comparing them with their siblings. Don’t be afraid to praise each child for their individual strengths, but never turn it into a competition. Even inadvertent comparisons between your children can cause lasting psychological damage and harm your children’s relationship with you as well as one another.