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Home / Estate Planning Articles / Is an Irrevocable Life Insurance Trust Right for You?

Is an Irrevocable Life Insurance Trust Right for You?

April 2, 2013

Compliments of Our Law Firm,

Written By: The American Academy of Estate Planning Attorneys

Irrevocable trusts are a common estate planning tool, and they provide valuable benefits in a variety of planning situations. For example, irrevocable trusts can be used:

  • To transfer assets to a beneficiary, while restricting the circumstances under which that person can access the trust property.

  • To make property available for a beneficiary to use, while shielding the property from the beneficiary’s creditors.
  • As part of a plan to qualify for Medicaid benefits for a person who anticipates the need for expensive nursing home care.

One of the most common irrevocable trusts is the Irrevocable Life Insurance Trust, or ILIT. You establish this trust with the purpose of holding your life insurance policy. Transferring your life insurance policy to an ILIT keeps the value of the policy out of your taxable estate at your death.

You will want to consider that, like all irrevocable trusts, the person establishing the trust (called the grantor) cannot change or revoke an ILIT once it is established. While you cannot change the terms of your ILIT after it is established, the trust document can be written to allow for a certain degree of flexibility. The way this is done is to let a trusted, neutral third party, normally called a special co-trustee or a trust protector, make limited changes to the trust under certain circumstances.

Here’s an example:

Imagine you establish an ILIT when your three children are very young. At that time, your trust provides that your children will share equally in your policy’s death benefit. However, you want to provide enough flexibility to modify your children’s shares to reflect their financial circumstances when they reach adulthood. If one of your children comes into a windfall, you might want the special co-trustee to reduce that child’s share and give his siblings a larger portion of the assets of the trust.

In addition to being able to modify to whom the trust is distributed, the special co-trustee could also modify how the assets are distributed. For example, if one of the children becomes disabled by a serious chronic illness, it may be beneficial for the portion of the ILIT assets going to that child to be held in a Special Needs Trust for their benefit instead. The special co-trustee could modify the trust so that the assets for that child continue in a Special Needs Trust for their benefit.

If an ILIT is consistent with your overall estate planning objectives it can be an invaluable tool for you and your family. Talk to an experienced estate planning attorney to learn what planning tools are best for helping you reach your goals.

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