How Does Irrevocable Life Insurance Trust Work?

how does irrevocable life insurance trust work

Life is unpredictable in many ways, and your life might suddenly shift or end. For this reason, most people in Florida know they should protect their families with a life insurance policy. One’s maturity in coping with premature disability or death is on display in this decision. But how can you be sure that the people who stand to inherit your life insurance will use the money wisely? The Irrevocable Life Insurance Trust (ILIT) tries to solve that issue. 

When someone close to us experiences a main life event, like death, it may significantly impact their outlook and choices. In light of this, it is prudent to establish an ILIT. Brightwell Law PLLC ‘s experienced, creative Pensacola, Florida, trust attorneys work directly with you and your family to create the best ILIT for your specific situation.

When planning for the future, one must consider the advice of the experienced. Our Florida estate planning attorney will provide you with the personal care and attention you need for your estate plan. We will provide you with sound counsel, high-quality work, and excellent service. Contact our law firm now to discuss your best options for an estate plan!

What is an Irrevocable Trust in Florida? 

how does irrevocable life insurance trust workAn irrevocable trust is a binding arrangement between a trustee, beneficiaries, and settlor that cannot be revoked or amended. The trustmaker, also known as the settlor, cannot recover property transferred to an irrevocable trust. The trustmaker cannot amend the terms or conditions of an irrevocable trust agreement, nor can they add or remove beneficiaries.

Transferring assets to an irrevocable trust is like gifting property to others, called trust beneficiaries, for good. When a property is placed in an irrevocable trust, the trustmaker cannot change their mind. In Florida, an irrevocable living trust is a trust created during the trust settlor’s lifetime.

Why Make an Irrevocable Life Insurance Trust (ILIT)?

Many people may ask why an irrevocable life insurance trust is crucial. Why not just get a life insurance policy? Life insurance is, in principle, already intended to meet the anticipated financial needs of your loved one. 

However, there are other factors for recommending a Florida ILIT, including:

  • Closing the Distribution Gap. There is a substantial difference between anticipating future financial needs and ensuring those needs are met. Trusts, in general, enable you to place limitations on assets even while you are not present. Life insurance, like a will, transfers funds to a specific location or place. 

A trust monitors how those funds are managed and distributed while on their way to the recipients. Thus, an ILIT enables you to guarantee that your beneficiaries use the earnings for the purposes you desire them to, such as paying for their education, clearing off debt, or other purposes.

  • Supervision and Imposing Conditions. After you die and the proceeds are sent to your ILIT, your chosen Florida trustee will be in charge of distributing the funds in line with the defined conditions of the ILIT documents. You will maintain control over this money by completing these documents in advance. This allows you to place certain conditions on how ILIC funds are to be used. Furthermore, the Florida trustee is legally obligated to the ILIT beneficiaries.
  • Irrevocability. Once formed, irrevocable trusts cannot be changed. This provides a firm foundation for your Florida estate planning. If you are incapacitated or infirm before your death, potential beneficiaries of the ILIT cannot take advantage of your circumstances and revoke the ILIT and its stipulations
  • Probate is avoided. The money in the ILIT will not become part of your Florida probate estate or gross estate since the ILIT retains the life insurance policy and monetary benefits in trust and arranges for the distribution of these assets by operation of law. Furthermore, the ILIT may be constructed such that it does not form part of your surviving spouse’s probate or gross estate.

How Does Irrevocable Life Insurance Trust Work in Florida?

The Irrevocable Life Insurance Trust involves three parties. The client who creates the trust is known as the grantor. A trustee, who is in charge of managing the trust, is also necessary. When the grantor dies, it is the trustee’s responsibility to distribute the assets of the life insurance policy to the trust beneficiaries. Finally, the trust must include beneficiaries, the people whom the grantor desires to inherit the life insurance proceeds upon their death.

The client can make financial contributions to the trust using the annual gift tax exclusion once the trust has been established by the estate planning attorneys. Multiple individuals can contribute to a single broad policy that benefits multiple beneficiaries without using anyone’s lifetime gift tax exemption. Presently, the annual gift tax exemption allows a person to gift up to $16,000 yearly without incurring any gift and estate taxes. Furthermore, this sum is not deducted from the same person’s lifetime exemption. The beneficiaries may forego the current gift (rather than the future proceeds), and the trustee uses the remaining gift to pay the life insurance policy premium.

An ILIT, once created and funded, has many benefits, including:

Reducing Estate Taxes

Since the insurance policy is owned by the trust, it is not technically part of your Florida estate. The life insurance proceeds may also be exempt from federal and state estate taxes. However, a properly-created ILIT may provide liquidity to pay applicable estate taxes and any debts or expenses connected with your estate. Additionally, you may transfer assets into the ILIT to lower the amount of your estate tax liability.

Gift Tax Avoidance

An ILIT may be arranged to benefit from the “gift tax exclusion.” You may give the yearly exclusion amount to anybody you like without incurring a gift tax. This could include but is not limited to an adult child, a grandchild, or anybody else without incurring a hefty gift tax. Your spouse may also take advantage of this benefit. Since contributions by the life insurance policyholder are deemed gifts to the beneficiaries, a well-drafted ILIT can avoid gift tax consequences.

Government Benefits

The proceeds of an ILIT-owned life insurance policy can help to protect the benefits of a trust beneficiary who receives government assistance, such as Medicaid or Social Security disability income. The trustee can carefully control the use of trust funds to ensure that the beneficiary’s eligibility for government benefits is not compromised.

Protecting Assets

Each state has its own set of rules and restrictions on how much death benefit or cash value is protected from creditors. Any coverage kept in an ILIT that exceeds these limits is often protected from the grantor’s and/or beneficiary’s creditors. The creditors can, however, attach any distributions made from the ILIT. Contact Brightwell Law PLLC to find out the rules and restrictions in Florida. 

Planning for Distributions

An ILIT permits trust assets to be distributed according to the policyholder’s pre-determined wishes, and the chosen trustee is responsible for administering the proper distributions to beneficiaries. However, choose wisely since your trustee will play a crucial function after your death.

We understand that utilizing this kind of trust in your estate planning may be unfamiliar. We appreciate that many of our clients may feel overwhelmed until they understand the long-term significance of this kind of trust. Please know that we are here to help you. If you or someone you know would want more information about an Irrevocable Life Insurance Trust from an experienced Florida estate planning attorney, call our law firm immediately for more details.

Bridging the Distribution Gap

There is a significant difference between anticipating a future financial need and ensuring those needs are satisfied. Trusts, in general, enable you to place conditions on your assets even if you are no longer alive. A life insurance policy, like a will, transfers money to a specific point. A trust monitors how that money is managed and transferred to those points. Thus, an ILIT helps to guarantee that your beneficiaries utilize the money for things such as education, debt repayment, or other desired purposes.

Avoiding Probate

Because the ILIT retains the life insurance policy and monetary benefits in trust and arranges for the distribution of these assets by operation of law, the money in the ILIT does not form part of your probate estate or gross estate. Furthermore, the ILIT can be constructed such that it does not form part of your surviving spouse’s probate or gross estate.

Exception Allowing ILIT Changes

An IRS exemption allows a trustmaker to modify an otherwise irreversible ILIT. The IRS allows individuals to modify the terms of an insurance trust by creating a brand-new trust with different trust provisions and transferring the life insurance policy to the brand-new trust. The IRS does not regard the transfer of life insurance to the new trust as a taxable event as long as the trustmaker remains the same and is responsible for income tax on all trust income.

Should You Talk to Your Family About Your Estate Planning?

Many of us work our whole lives to accumulate assets and fight for important causes. Few things are more rewarding than the prospect of passing on everything we have worked so hard for to our children. Of course, it’s hard to prepare for every conceivable scenario, but proper planning may lessen two future risks:

  1. Your intentions for your estate were unclear, perhaps leading to an expensive, time-consuming dispute.
  2. Your children or other beneficiaries did not understand or appreciate your wealth management vision, which resulted in assets being managed poorly after your death.

The good news is that you can lessen the chance of both risks by being open and honest with your family now. While it may be uncomfortable to bring up the subject, a family gathering around the holidays may be an excellent opportunity to discuss your estate plan with your children and loved ones. You might also utilize that time to schedule a next family gathering to go through your estate plan.

Should You Tell Your Family What Is In Your Estate Plan?

Unfortunately, estate planning can cause family members to quarrel. Someone who discovers that they will inherit little or nothing may develop resentment. Because you know your family best, you must decide whether to reveal your plans now or later.

It’s important to remember that your family may not object to your estate plan until after your passing. This is why it is necessary to have an official will and other documentation in a location where they can be accessed after your death. You want your intentions to be carried out, so be sure the papers you will declare satisfy all legal requirements. An estate planning lawyer can help you with this.

Should You Inform Family of the Location of Important Documents?

Your family has to locate your will and other estate planning documents to execute your desires. Family members may be unable to find the will or financial papers for many weeks or months following the death, causing delays in funeral arrangements and bill payments. It is critical to inform someone where you keep important documents.

You may choose to inform one or none of your family members. The will may be kept in a sealed envelope or a locked safe. It is all up to you. However, remember that the papers need to be found and read in the future. One option is to keep copies of your documents in different places. You can leave one copy with your estate planning attorney and the other in a locked desk drawer with the key in an accessible area.

Contact our Experienced Trust and Estate Planning Attorney in Pensacola, Florida, Right Now!

Brightwell Law’s dynamic legal services team is ready to help you with your estate planning needs. Our objective as one of the top law firms in Florida is to protect your and your family’s interests. Give us a call for an appointment right now!

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