Estate planning involves many steps intended to help the planner and any beneficiaries. Often, beneficiaries receive assets as specified by a will, but some accounts may transfer to named beneficiaries. Life insurance policies also name beneficiaries, and an insured resident from Indiana may purchase a substantial insurance policy. Concerns might exist about estate taxes, leading some planners to consider an irrevocable life insurance trust (ILIT).
Understanding an irrevocable life insurance trust (ILIT) involves understanding federal estate taxes. The estate tax exemption is $12.06 million per individual and $24.12 million per couple. Amounts beyond those numbers are subject to estate taxes. Now, estate planning is about directing funds and assets to a beneficiary and addressing any obligations the beneficiary may incur. An ILIT could help a beneficiary from a tax obligation perspective.
An ILIT cannot only not be revoked once it is changed after the policyholder purchases it. A benefit of an ILIT is the beneficiaries may be shielded from estate taxes. The monetary savings could be significant.
An estate planner might find value in another ILIT benefit: the planner could have a say over how the beneficiary uses the trust’s funds, an element of many trusts. Some may use the trust’s funds to pay estate taxes. The grantor might attach a document that addresses using the trust’s funds to pay the taxes.
Estate planners might wish to review all the rules associated with an irrevocable life insurance trust. Some may not realize an ILIT could present less flexibility than a traditional life insurance policy. For one, borrowing from an ILIT is not allowed. Reviewing these and other rules could allow an estate planner to make an appropriate decision.