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Irrevocable Life Insurance Trusts: A Valuable Tool You May Not Know

Seat BeltYou buy life insurance policies to provide for your loved ones after you are gone. If your estate is large, however, some of the insurance proceeds may end up going toward estate taxes—and that’s important because the estate tax rate is now 40%.

To shield the payout from your life insurance policy, you can set up an irrevocable life insurance trust (ILIT), which becomes the beneficiary of your life insurance and allows the proceeds to pass to your heirs without being subject to estate tax. Basically, the trust owns the policy.

Here’s a summary of some benefits that you might realize through a properly structured and administered ILIT:

  • Maximizing the inheritance while minimizing taxes
  • Insulating the life insurance proceeds from estate taxes for one or more generations
  • Providing income to your spouse while the trust retains the bulk of the assets for your children upon her death (through the marital deduction, spouses can receive the proceeds without taxation, but without a trust, your children might not), or even skip generations
  • Providing liquidity to the estate through loans or purchases, which can allow the estate to cover taxes, debts, and expenses
  • Keeping the insurance proceeds out of public probate; all provisions of the trust are private
  • Possibly protecting the proceeds from your creditors or the creditors of your beneficiaries
  • Allowing the trustee to delegate investment powers to a professional advisor

Decisions, decisions

You’ll want to work with a very experienced estate planning attorney when you set up an ILIT because the laws are complicated and you’ll need guidance in making a number of important decisions about how to structure the trust. For instance:

  • If you don’t already have a life insurance policy, you’ll need to decide what type of policy you will want to have inside the trust: term life, whole life, universal life, variable life, or variable universal life. A knowledgeable insurance representative can help you decide.
  • Do you want to transfer an existing policy into the trust? If it has cash value, then that value erodes your lifetime gift-tax exclusion. And if you transfer in an existing policy, it won’t be shielded from estates taxes if you die within three years of transferring it.
  • You can set up a new life insurance policy within the trust, but you have to make sure that you are still insurable at an acceptable premium rate. The trust would then follow the prescribed procedure to buy and own the policy.
  • Will you put other assets into the trust to fund the premiums for the policy or will you make annual payments to it so that it can pay the premiums?
    • If you add other assets to the trust beyond your annual exclusion amount, they would generally be considered a gift that would go against your lifetime gift-tax exclusion.
    • If your ILIT is a grantor trust (which most are), the income, gains, losses, etc., must be included on your tax return. (If it is not a grantor trust, then the trustee would file on behalf of the trust.
    • The money you supply for premiums might also be considered a gift (requiring an annual federal gift tax return), although there are ways to structure the trust to avoid that if you are gifting an amount less than or equal to the current annual gift tax exclusion amount each year (the details of which are much too complicated to discuss here).
  • Who will be the trustee or trustees? You cannot be. Your beneficiaries can, but choosing them might present conflicts of interest, and if your ILIT is complex, they may not be able to properly fulfill the duties. A professional trustee will be more costly but should have the impartiality and knowledge necessary to administer the ILIT to best effect.
  • If you have put other assets into the trust, you’ll want to determine how those assets will be managed. Will you want the trustee to manage them or will you want the trustee to delegate that power to an investment manager?


Some Important Estate Planning Numbers for 2014

Estate Tax Exemption*

$10,680,000 for a married couple**

Estate Tax Rate


Lifetime Gift-Tax Exemption


Maximum Gift-Tax Rate


Annual Gift Tax Exclusion Amount*

$28,000 per married couple

*Indexed for inflation

**If spouses take advantage of the portability of the estate tax exemption

NOTE: These are federal rates; California will not impose an additional tax.


Once you have created an ILIT, you cannot change its terms (although you can change the trustee, with or without cause). This means that you’ll need to rely on expert counsel to make the necessary decisions. As with other irrevocable trusts, you can’t tap its assets if you get into a financial jam. You need to be sure to fund a trust only with money that you can live without.

If you think an ILIT might be a valuable estate planning tool for you, contact an experience estate planning attorney who is very familiar with ILITs. You and the attorney can discuss the pros and cons of all the various options and determine how you want to structure your ILIT so that it provides you and your family with the most value. You may also want to consult an insurance representative who specializes in life insurance.

If you’d like to find out more about irrevocable life insurance trusts, please call or e-mail us today at (925) 365-1533 or

Accretive Wealth Management is not a law firm or an insurance firm, and we cannot provide legal advice or sell you insurance policies. However, would be happy to put you in touch with an experienced estate planning attorney or 

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