How Can an Irrevocable Life Insurance Trust Be Used

An irrevocable life insurance trust can be put to a variety of uses:

• If your estate is likely to face a federal estate tax liability, an irrevocable life insurance trust can replace funds used to pay the estate tax, without the death proceeds also being subject to the estate tax.
• If your heirs are likely to need additional estate liquidity after your death, such as to continue a family business, an irrevocable life insurance trust can provide that liquidity, again without the insurance proceeds being subject to the federal estate tax.
• If you want to control how death proceeds are distributed, you can do so through the provisions included in an irrevocable life insurance trust.
• If you have children from a prior marriage, but want your current spouse to be the primary beneficiary of your estate, naming your children the beneficiaries of an irrevocable life insurance trust can provide them with a distribution at your death, rather than at your surviving spouse's later death.
• If you want to leave your loved ones a substantial life insurance estate, an irrevocable life insurance trust can be used to pass the full value of life insurance proceeds to your heirs estate tax free.
• If you want to make a substantial bequest to a charity, either during your lifetime or at your death, an irrevocable life insurance trust can play a wealth replacement role, with the proceeds from the trust replacing for your heirs the value of assets given to charity.

If you are considering use of an irrevocable life insurance trust, however, it is important that you also evaluate the potential drawbacks of this arrangement:

• Since the trust is irrevocable, you relinquish control of the life insurance policy and annual gifts made to the trust. In addition, once the trust document is executed, you cannot change the terms or terminate the trust.
• If the trust contains the Crummey withdrawal provision in order to qualify the gifts to the trust for the annual gift tax exclusion, a beneficiary may exercise his or her right to demand a withdrawal.
• There is some expense involved. In addition to possible trustee fees, you should consult with an attorney experienced in estate planning in order to avoid unforeseen tax and distribution consequences.