Monday, September 13, 1999
ASK THE MONEY PANEL
Irrevocable life insurance trust explained
Question: I am recently retired and have a very large retirement account. Some of my fellow retirees have been talking about an irrevocable life insurance trust. What is an irrevocable life insurance trust?
Answer: C. Daniel Payne, a chartered financial consultant and certified life underwriter with Northwestern Mutual Life Insurance Co. in Cincinnati, says that an irrevocable life insurance trust (ILIT) has life insurance policies as the sole asset of the trust. You make annual gifts of cash to the trust so that the trustee has funds to pay the premiums owned by and payable to the trust. The concept cre ates tax exempt wealth since the proceeds are paid outside your estate and not subject to federal estate tax or income tax.
There are several good reasons for using the ILIT. Estate taxes are avoided, thus eliminating an entire generation of estate taxes. The life insurance policies and proceeds are protected from creditors of your spouse and other beneficiaries. Management of the insurance proceeds can be performed by a competent trustee according to your specifications as contained in the trust.
Privacy is also maintained at death since the terms and assets are not part of the probate estate.
The ILIT is a most attractive vehicle to provide available cash to pay estate expenses and taxes. The tax-free proceeds received by the trust have been dramatically increased by the multiplier effect of the life insurance.
There are also a few disadvantages to the ILIT. It is irrevocable — you may be reluctant to make an irrevocable commitment of assets, which will likely cover a long period of time.
Also, the trustee owns the life insurance policy and since usually a policy with a cash value is used, the cash values will not be available to you for emergencies or opportunities.
To understand more about the ILIT, information is available from various sources, such as the library, an attorney or tax adviser. Regardless, careful consideration and planning will be required to implement an ILIT.
— Compiled by Amy Higgins
Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
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