As you weigh the various components of estate planning in Indiana, you’ll encounter unfamiliar and confusing terms involving ways to protect your assets. An irrevocable life insurance trust (ILIT) is one of those terms. Here is what you need to know about creating one.
You can fund an ILIT with one or more life insurance policies during your lifetime. The trust is irrevocable, meaning the terms you set when you create it cannot be changed. ILITs are useful estate planning tools because they avoid having your policy’s death benefit included as part of your estate that the federal government may tax. An ILIT also allows you to direct how and when the proceeds will be used, along with who will get them. In addition, an ILIT will also allow a grantor (you) to fully leverage the annual gift tax exclusion, which is $16,000 per year per beneficiary.
The most significant disadvantage of creating one of these trusts is giving up all rights to the assets. You can’t use the funds during your lifetime, so the assets become trust-owned, used almost exclusively for legacy purposes. Cost is another concern, as setting up and maintaining an ILIT may require future professional fees and filing a gift tax return.
Is an ILIT trust right for me?
Creating the various trusts for your estate plan can be a complicated undertaking. Making matters even more confusing is that estate laws are in flux, with exemptions set to revert to prior limits in 2026. If you have a large estate, you may still need to consider federal, as well as state, estate tax limits. Besides inheritance taxes, an ILIT can protect your assets from creditors, divorce and legal actions against you and your beneficiaries.
ILITs are similar to other trusts in that they avoid probate and shield your assets from the expense and loss of privacy during that legal process. Weigh your options and take the time to do so. If you have a large estate, most likely, you will consider a combination of trusts to protect assets.