An Irrevocable Life Insurance Trust (ILIT) is a specialized type of trust designed to hold a life insurance policy outside of the insured’s estate for estate tax purposes, ensuring that the death benefit can be distributed to beneficiaries without being subject to estate taxes.
An ILIT is created by a grantor who transfers ownership of a life insurance policy to the trust. Once the policy is transferred, the grantor cannot make changes to the trust or reclaim the policy, hence the term "irrevocable." This characteristic is essential because it ensures that the value of the life insurance policy is not included in the grantor’s taxable estate when they pass away.
Upon the death of the insured, the death benefit from the life insurance policy is paid directly to the ILIT and can be distributed according to the terms set forth in the trust. This setup allows for the death benefit to be used to provide liquidity for estate taxes, fund other investments, or support the financial needs of beneficiaries, without increasing the estate tax liability of the insured.
For example, if a person has a life insurance policy worth $1 million and places it in an ILIT, the policy’s value is removed from their estate. When they pass away, the $1 million benefit can be distributed to the beneficiaries without being taxed as part of the estate, thereby maximizing the financial legacy left to heirs.
In Texas, including Houston and surrounding areas, establishing an ILIT may be particularly beneficial for individuals with significant assets who wish to minimize estate taxes and ensure that their life insurance proceeds are managed according to their wishes.
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