For many families, passing on their wealth often raises a number of questions. How can I best provide for my children? How do I leave more to charity? How can I ensure that my spouse and kids do not have to pay estate taxes, probate costs, or outstanding debt?
The Irrevocable Life Insurance Trust (ILIT) has been a longstanding tool used for the tax-free transfer of assets. Properly structured, the ILIT can eliminate income, gift, and estate tax on almost unlimited amounts of life insurance death benefits, which helps families ensure that more money is being passed on to the people and causes they care about.
How Do ILITs Work?
In an irrevocable insurance trust, the trust owns your insurance policies. As the trust creator, you name a trustee to manage your trust. Then, the trustee purchases the insurance policy with you as the insured and the trust as the owner and typically the beneficiary. Because you hold the life insurance in a trust rather than directly owning the insurance yourself, it will not be factored into your estate.
When the insurance benefit is paid after you pass away, the trustee collects the funds, makes them available to pay estate taxes or other expenses, such as debts or legal fees, and then distributes the remaining funds to your irrevocable life insurance trust’s beneficiaries. By using the life insurance proceeds to pay some or all of your costs, you can leave more to your loved ones.
Managing an Irrevocable Life Insurance Trust
It is important to note that irrevocable insurance trusts are sophisticated financial tools. To properly design an ILIT, you should enlist the competent advice of an estate planning attorney. Due to the complex tax issues associated with irrevocable insurance trusts, ILITs also require careful administration if they are to be successful.
First Western Trust manages all of the irrevocable life insurance trusts in which we are the trustee from a single office. Our trust officer assigned to this responsibility monitors all of our ILITs to assure that premiums are in the trust account in advance of the premium payment deadline, sends the necessary beneficiary notices (so-called “Crummey Notices”), pays premiums when due, and annually obtains a policy review from an independent rating agency to update the financial condition of the life insurance company and the policy.
Additionally, our trust officer is available to answer any questions from the trust creator or their beneficiaries. We are committed to the total financial health of our clients, so our teams take the time to understand your needs as well as those of your beneficiaries. By learning about your goals for every dimension of your wealth, we are able to deliver the tailored financial solutions you need to reach your objectives.
By providing this level of dedicated support and focused expertise, our First Western Trust team is well-equipped to manage the complexities of Irrevocable Life Insurance Trusts and to support the needs of our clients and their beneficiaries.
If you need assistance structuring creative financial solutions to manage your estate tax and legacy planning needs, please contact our Trust team by filling out the form below or by calling us at 303.531.8100.
Investment and insurance products and services are not a deposit, are not FDIC- insured, are not insured by any federal government agency, are not guaranteed by the bank and may go down in value. First Western Trust Bank cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.