How an Irrevocable Life Insurance Trust (ILIT) Fits into Your Estate Plan

Crafting a comprehensive estate plan often requires using various legal tools and strategies to ensure that your financial and personal goals are met. Among these tools, a trust can be an essential component. Trusts have developed over time to serve highly specific purposes, and one such specialized trust is an Irrevocable Life Insurance Trust (ILIT). The Indianapolis attorneys at Frank & Kraft explain how an ILIT works and how it can fit into your estate plan to help protect your assets, reduce taxes, and plan for end-of-life expenses.

Why Funeral Planning Matters

Although thinking about your own funeral may be uncomfortable, addressing the financial aspects of it in advance can ease the burden on your loved ones. The reality is that funeral and burial expenses can be significant. On average, even a simple service can cost around $10,000, with expenses increasing for larger gatherings, premium caskets, or elaborate memorials. Planning ahead can help ensure that these costs are covered without causing financial hardship for your family. One effective way to fund funeral expenses is through an ILIT, which offers both financial and estate planning benefits.

Understanding How a Trust Functions

A trust is a legal arrangement that allows a Trustee to manage assets on behalf of designated beneficiaries. Trusts generally fall into two broad categories: testamentary trusts and living trusts. A testamentary trust is created through a provision in a Will and only becomes active after the Settlor’s passing. A living trust, on the other hand, takes effect during the Settlor’s lifetime and can be either revocable or irrevocable. A revocable trust allows changes or termination by the Settlor, while an irrevocable trust cannot be altered once established, making it a powerful tool for estate tax planning.

What Is an ILIT and How Does It Work?

An Irrevocable Life Insurance Trust (ILIT) is a trust specifically designed to hold a life insurance policy, offering both estate tax benefits and the advantages that come with trusts in general. While life insurance proceeds are typically exempt from income tax, they are generally included in the policyholder’s taxable estate, potentially subjecting them to federal and state estate taxes. Since estate tax rates can be as high as 40 percent, reducing taxable assets is a key consideration for many individuals.

By creating an ILIT, the trust, not the individual, becomes the legal owner of the life insurance policy. When the insured person passes away, the proceeds are paid directly to the ILIT, rather than to the insured’s estate, thereby keeping them outside the taxable estate. Even though the insured funds the premiums of the policy, careful structuring of the trust ensures that these funds do not trigger estate tax liability. This strategic approach allows the full value of the life insurance payout to be preserved for beneficiaries.

Using an ILIT for Funeral and Burial Planning

Beyond providing financial security, an ILIT can be structured to address specific funeral and burial arrangements. Including detailed instructions in the trust document ensures that your final wishes are carried out as intended. You can specify whether you prefer burial or cremation, designate a burial site, or outline the type of service you want. You may even dictate finer details such as the selection of music, readings, or floral arrangements. Since the Trustee has a legal obligation to follow the terms of the trust, an ILIT minimizes the likelihood of disputes among family members regarding funeral decisions.

Additional Benefits of an ILIT

In addition to covering funeral costs and reducing estate taxes, an ILIT can provide long-term financial benefits for your loved ones. The trust can be structured to distribute funds according to specific terms, ensuring that beneficiaries use the money wisely. It can also offer asset protection, safeguarding the proceeds from creditors, lawsuits, or mismanagement.

Integrating an ILIT into Your Estate Plan

An ILIT is just one component of a well-rounded estate plan. Consulting with an experienced estate planning attorney can help you determine whether an ILIT aligns with your overall objectives. Properly setting up and funding the trust is crucial to maximizing its benefits. Whether your goal is to ease the financial burden on your family, ensure your final wishes are honored, or reduce estate taxes, an ILIT can be a valuable tool in achieving these objectives.

Do You Have Additional Questions about How and ILIT Fits into Your Estate Plan?

For more information, please join us for an upcoming FREE seminar. If you have additional questions about how an ILIT fits into your estate plan, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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