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Irrevocable Life Insurance Trusts for Term Insurance

Did you know life insurance is a taxable asset in your estate?  It’s true. A lot of people think life insurance is “tax free” and that’s simply not the case. It does, generally, build in value without income tax.  However, at death it is an asset of the deceased’s estate and subject to estate tax at whatever the then prevailing tax rates are.  If they do not change the laws in the next three weeks life insurance could be taxed at 55% at your death. Yes, really I said FIFTY-FIVE PERCENT!  If not properly owned your two million dollar term life policy might be worth less than one million to your loved ones.  Can that problem be fixed?

The good news is that if life insurance is properly owned, in an irrevocable trust, it will not be subject to that horrific tax rate.  As long as the policy is acquired, at the time of issuance, by the irrevocable trust or you live at least 3 years after transferring into the irrevocable trust there will be no tax.

Yes, really!

An irrevocable life insurance trust, often called an “ILIT” is an incredible estate planning device. However, avoiding tax is not the only thing it can do.

What about establishing a creditor protected sum of money for your spouse, kids, or other loved ones?  YES, an ILIT can do all that too!

I just set up an ILIT for a doctor client and his one million dollar term life insurance policy. He is not currently married but we built in the possibility of leaving some of the money to a future wife if he does marry and otherwise the money will be held in trust for his children.

The key is the money will be HELD IN TRUST with a trustworthy trustee managing the money for his future wife and/or kids. Next time he goes in for surgery he will have great peace of mind that his affairs are set up properly!

Historically a lot of people set up ILITs only for “whole life” (or cash value) life insurance policies.  They were often used for second to die policies that didn’t pay until the second death and were mainly for creating tax free wealth.  However, it’s my opinion that setting them up for term policies can be even smarter.

The cost to establish an ILIT is not great, the administrative issues are minimal, there should be no on-going costs of having the trust and you can create an incredible vehicle for your loved ones. A vehicle that can provide tax free and creditor protected money for your spouse, kids or other loved ones.

There is really little down side, in my opinion, to setting up an ILIT for term life policies.   Yes, an ILIT is irrevocable which means it can’t be changed but hopefully we can build in enough flexibility that changes are factored into the original trust!  The key with an advanced estate planning device, like an ILIT, is to select a highly competent estate planning attorney.

I, for example, am a Certified Specialist in Estate Planning, Trust, and Probate law by the California State Bar Board of Legal Specialization. This means I took a second bar exam and passed a rigorous background check regarding my knowledge of estate planning laws.

I am only licensed in California so if you are in another state you should find an attorney near you with similar qualifications. However, if you are anywhere in California please contact me and I can assist you with an ILIT!

Ratings and Reviews

10.0John Bernard Palley
Wealth Counsel Member
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