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The Heritage Law Center, LLC Blog

5 Reasons for an Irrevocable Life Insurance Trust

POSTED ON: December 22, 2020

father discussing irrevocable life insurance trust

In Massachusetts, trusts help many people protect their assets and leave a financial legacy for their heirs. When deciding whether an irrevocable life insurance trust is right for you, it’s a good idea to consult an experienced Massachusetts estate planning attorney. After becoming familiar with your unique circumstances, a knowledgeable trust attorney will be able to suggest an estate planning strategy tailored to your needs.  

For those with life insurance, estate plans incorporating irrevocable life insurance trusts might be a good idea. Let’s examine the benefits of irrevocable life insurance trusts. 

5 Benefits of Having an Irrevocable Life Insurance Trust

An irrevocable life insurance trust (ILIT) takes ownership of a person’s life insurance policy. Once the insurance policy is transferred into the trust,  neither the life insurance policy nor the trust’s provisions can be changed. Despite the permanence of an ILIT, there are several advantages to placing your life insurance policy in an irrevocable life insurance trust.

1. Estate tax protection

A prime consideration for most people using ILITs is estate tax avoidance. Estate taxes are based on an estate’s gross value, which may include life insurance policy benefits. However, when a life insurance policy is held in an irrevocable life insurance trust, the death benefit remains separate from the gross estate, and it’s protected from taxation. 

2. Control over distribution to beneficiaries

An ILIT allows its grantor (the person who created it) to specify how trust funds will be managed and distributed to the beneficiaries. This lets grantors specify how they would like the funds to be used by their heirs (e.g., education, a first home, a new business, etc.). 

This allows a grantor’s wishes to be fulfilled after their passing, and it also safeguards against waste and mismanagement of large inheritances. 

3. Protection from creditors

ILITs protect insurance policy benefits from creditors; both those seeking compensation against the estate and those of any beneficiary. It’s important to note that creditors can’t access assets in the trust, but they can likely access assets once they are distributed to the beneficiary. 

4. Protects government aid eligibility for heirs

If you have beneficiaries that receive or may receive government assistance, protections under an ILIT may preserve their rights to receive aid. ILIT provisions regarding when and how trust distributions are issued and used can avoid compromising a beneficiary’s right to benefits. 

5. Gift tax exclusion

While Massachusetts doesn’t have a gift tax, contributions to an ILIT may be considered federally taxable gifts to the trust’s beneficiaries. However, there’s a way to avoid federal gift tax. 

Federal gift tax exclusions can be applied to annual gifts of $15,000 or less per beneficiary by issuing a Crummey Letter:

  • A Crummey Letter must be sent to each beneficiary at least one time a year.  
  • The Crummey Letter must offer beneficiaries a time period, generally 30-60 days, to claim their gifted share of money in the ILIT.

The general idea is that the beneficiaries are notified of their right to claim the gifted funds but won’t do so. After the allotted time expires, the unclaimed funds are regarded as gifts to the trust from the beneficiaries, successfully avoiding the gift tax on amounts deposited into the ILIT. 

Trustees may then use the funds to pay the insurance policy premiums, and grantors are encouraged to continue making contributions to the trust. 

How Can a Massachusetts Estate Planning Attorney Help You? 

Some people shy away from irrevocable trusts because of their inflexibility. However, irrevocable life insurance trusts offer valuable benefits of asset protection and estate tax reduction.

If you have a life insurance policy that may push your estate value past the Massachusetts estate tax threshold, you might want to consider an ILIT as part of your overall estate plan.

To learn more about whether an irrevocable life insurance trust is right for you, reach out to us. As an experienced Massachusetts estate planning attorney, Matthew Karr, Esq., is ready to answer your questions and put his knowledge to work for you. By working with our legal team, you’ll be confident that your future will be well protected through trust and estate planning options tailored to your personal needs.