What is an Irrevocable Life Insurance Trust (ILIT)? Kirkland Estate Planning Attorney Knowledge
Yes, this is another one of those informational posts. Today we’re talking about the irrevocable life insurance trust.
Here’s the way I see these posts.
Have you ever played a sport? Ever played an instrument? Ever really learned a subject really in depth?
If you said yes to any of those things, than you’ll get why I’m doing these posts.
You Have to Walk Before You can Run
Estate planning shouldn’t be something you don’t understand.
In fact, it doesn’t have to be something you don’t understand.
What estate planning attorneys often do, though, is jump in right in the middle and start explaining stuff.
Instead, just like when you are learning something new for the first time, it’s critical to learn and understand the fundamentals before you try to go off and do something higher level.
That’s why I’m writing these definition posts. It’s important for you to know what it is I’m talking about.
My hope is as you begin to understand these concepts (which are not overly complicated, we just name them that way so people will think we’re smart) you will begin to get a more comprehensive understanding of how your estate plan fits together (both within the estate plan itself and as it relates to your financial planning, accounting, and other areas).
Okay, now that we got that out of the way, let’s talk about irrevocable life insurance trusts.
What is an Irrevocable Life Insurance Trust?
An irrevocable life insurance trust is a trust (any word that is highlighted you can click on to get the definition of that word) whose primary asset is a life insurance policy (you can put other stuff in it, like cash, but that’s usually just to pay for the insurance premiums on the life insurance policy).
But this trust isn’t your garden variety trust. It has a couple of special qualities.
First, this trust is irrevocable. That means, absent some pretty specific circumstances, once you create this trust and put the life insurance policy in it, it’s staying there (the life insurance policy). You cannot take the policy back into your own name.
Second, because this trust is irrevocable, you are not the trustee. Usually it’s a bank or someone else (you get to appoint the trustee).
Third, you get to name the beneficiaries.
Fourth, you get to dictate the terms upon which the funds are distributed (just like any old trust).
How Does an Irrevocable Trust Work?
It’s pretty simple, really.
First, you create the trust and appoint the trustee (not you).
Second, the trust (not you – this is important) purchases a life insurance policy on you.
Third, when you die, the trust receives the life insurance proceeds and distributes them as you have set forth in the trust.
Why Create an Irrevocable Life Insurance Trust?
Let’s answer that next…
P.S. Do you have kids? Have you completed guardianship paperwork? Have you done it correctly? Click here to find out what happens if you don’t do anything: Are you okay with a judge choosing the guardians of your children?
P.P.S. Do you own a business? Do you have a plan so the business, and your family, can survive if something happens to you? If not, click here to learn how simple it is to protect your business and your family from tragedy: 5 Ways to Protect Your Business from Catastrophic Failure.
P.P.S. Do you have no kids and think you don’t need an estate plan? Single and think a will is only for married couples. You couldn’t be more wrong. Click here to learn more: 5 reasons estate planning is a must have even if you don’t have kids.
Christopher Small is a Kirkland estate planning attorney who helps people get rich and live forever. He is also the owner of CMS Law Firm LLC.