Estate planning helps families, individuals and business owners meet their long-term goals in Concord, California. Irrevocable life insurance trusts, or ILITs, are common when dealing with estate planning. With recent tax cuts and law changes, do ILITs make sense? The estate tax exemption limits are $11.4 million for individuals and $22.8 million for couples, so shielding more money from the government may involve ILITs.
What is an irrevocable life insurance trust?
Irrevocable life insurance trusts will refund one or more of a person’s life insurance policies over their lifetime. It’s an irrevocable trust, so a person typically can’t revoke or change the trust terms after creating it.
Benefits of ILITs
A person moving their life insurance into a trust is permanent, but there are benefits for doing it. An ILIT can help avoid a policy death benefit in an estate for federal tax reasons. If the death policy is in the trust, a person can direct when and who gains from it. A life insurance policy in a trust can help pay estate taxes after death, which may prevent the need to sell a high-value asset.
Do ILITs still make sense?
The current estate laws will revert to prior limits in 2026, which were $5 million for individuals and $10 million for couples. A person with a growing business may consider using an irrevocable life insurance trust. By taking advantage before the limits reset, a person can create another trust or add to a current one.
The federal estate tax is a concern but not the only one. Some states have separate estate taxes alongside the federal ones. Policies in irrevocable life insurance trusts can help pay the state estate taxes and other expenses.
There are multiple advantages to using irrevocable life insurance trust, such as directing where the payouts go and helping to pay expenses after death. An ILIT isn’t as necessary under current laws because of the higher estate limits, but it could help when the law reverts to a lower limit. There are tax-free death benefits that include insurance protections from divorce, legal suits, or creditors.