Life insurance offers you the opportunity to help prepare loved ones who depend on you financially. Specifically, the death benefit in a life insurance policy can help provide your family monetary protection amidst a devastating loss if you were to pass.
When choosing a policy and naming a beneficiary, you can make certain decisions that can yield even more support, like creating an irrevocable life insurance trust (ILIT). Some people may refer to these as ILIT trusts or ILIT life insurance.
What is a Life Insurance Trust (ILIT)?
Before we dive in, it’s important to note there are two common kinds of life insurance, term and whole life. Whole life insurance is a type of permanent plan because it lasts the policyholder’s entire life, while term life insurance lasts for a specific number of years.
In a whole life insurance plan, the beneficiary receives the death benefit regardless of when they pass. On the other hand, term life insurance payouts only happen if the policyholder passes within the set term length.
To receive life insurance benefits, a policyholder must pay regular premiums, and when they pass, their beneficiary will receive a death benefit. However, there are a few decisions you can make to protect your loved ones.
An estate tax is a tax based on the total value of assets in one’s estate. The specific percentages vary from state to state, but federal estate taxes kick in when one’s estate is more than $12.92 million.1 When you inherit a death benefit after someone passes, this sum is included in the overall value of the estate and can tip it over the threshold.
One of the best ways to help protect yourself from estate taxes after inheriting the death benefit in a life insurance policy is setting up a life insurance trust and naming the ILIT as the beneficiary in your plan.2
An ILIT requires a grantor, trustees and beneficiaries to work correctly. Usually, the grantor is the person who creates the life insurance trust, or ILIT, and pays for the life insurance premiums. Then, the grantor relinquishes the life insurance trust control to the trustees. From there, the trustees ensure that the beneficiaries can receive the assets living in the trust.2
