Why use an irrevocable life insurance trust?

On Behalf of | Aug 25, 2021 | Probate & Estate Planning |

When people in Pennsylvania think about planning for the future, they may consider an irrevocable life insurance trust (an “ILIT”) in order to reduce estate taxes while providing for their families. This type of trust is designed to serve as a repository for one or several life insurance policies and is used to protect assets, particularly death benefits paid out by these policies, from a large estate tax burden.

Estate tax exclusions

Estate taxes are collected by the federal government, while Pennsylvania has its own inheritance tax. However, there are also large exemptions in place that may shield many families from the effects of federal estate taxation. Because of the marital exclusion, spouses do not need to pay estate taxes after their spouse passes away. This includes life insurance proceeds as well as other property and inherited funds. However, estate taxes may kick in when the surviving spouse passes away, typically when the property passes to children, grandchildren, or other beneficiaries.

Considering an irrevocable life insurance trust

As of 2021 there is an $11.7 million exemption from federal estate taxes, which may be sufficient to exclude many if not most estates from this burden. However, people with substantially greater funds may wish to consider an irrevocable life insurance trust as part of their estate planning process. Because the trust is both the owner and the beneficiary of the insurance policy, it exists legally outside of the purview of the estate. Very wealthy people may also be more likely to have significant life insurance policies, making these trusts more appealing. The trust is set up by naming trustees, who will invest and administer the proceeds of the insurance policy for the benefit of intended recipients.

However, it is important to note that irrevocable life insurance trusts are, as indicated in their name, irrevocable. Unlike other life insurance decisions, these trusts cannot be reversed, amended or changed. These types of trusts, along with other sophisticated strategies, may help people to protect their assets for their loved ones.

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