The Advantages of Irrevocable Life Insurance Trusts
The Advantages of Irrevocable Life Insurance Trusts (ILITs)
When it comes to protecting your assets and ensuring they are passed down effectively, Irrevocable Life Insurance Trusts (ILITs) offer numerous benefits. Below are some of the key advantages of setting up an ILIT:
1. Asset Protection from Creditors
A well-structured ILIT can shield your assets from creditors by ensuring the assets are not owned by the beneficiaries. This protection extends to:
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Lawsuits: If an heir is involved in an accident causing harm, the assets in the trust are safe from claims.
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Divorce: Assets and future income within the trust are safeguarded from divorce settlements.
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Family Dynamics: An outside trustee can protect heirs from making poor financial decisions or from being pressured by others. For instance, one of our clients placed assets in trust for his wife to shield her from feeling obligated to fund her brother’s ill-conceived business ideas. The trust took her out of the uncomfortable position of saying “no.”
In another case, a client used an outside trustee to manage his son’s inheritance. The son had a history of making questionable life decisions, and the trust ensured his daughter didn’t have to manage her brother’s funds or deal with the fallout.
2. Estate Tax Protection and Asset Growth
With proper planning, an ILIT can protect your estate from taxes while leveraging asset growth. Here’s how:
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Estate Tax Exclusion: If written correctly, the assets in the trust are not part of the estate and therefore avoid estate taxes.
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Asset Growth at Little Cost: Life insurance products allow you to create a substantial asset base inside a non-taxable entity for relatively little upfront investment.
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Income Management: A deliberately defective trust can ensure income generated by trust assets is taxable to the donor, allowing you to transfer additional wealth to heirs without estate tax implications. For example, a $1,000,000 donation invested at 5% generates $50,000 in annual income, which is taxed to the donor but not considered a gift for estate tax purposes.
Additionally, a trust can be structured to allow the trustee to use assets in the trust to create tax-free income for donors, while reducing the size of the taxable estate.
If you want help with our experts, schedule a meeting with Keith Solomon.
Contact him at Ksolomon@sethandalexander.com or 713-965-7572 ext. 744.