Irrevocable Life Insurance Trust (ILIT)

What Are the Pros and Cons of an Irrevocable Life Insurance Trust?

As with any estate planning tool, there are advantages and drawbacks to using an ILIT with some of the top being:

Pros:

• Tax-free growth: A life insurance policy’s cash value is tax-deferred, leading to a more significant death benefit for beneficiaries.
• Avoids probate: Assets in an ILIT are not subject to probate, which allows beneficiaries to receive their inheritance faster and with a lower risk of disputes.
• Control over distribution: You will determine how the trustee should distribute funds. For example, you can stipulate that the beneficiaries will receive funds at certain ages, in specific installments, or for particular purposes.
• Provides for beneficiaries with special needs: You can structure your ILIT to provide for beneficiaries with special needs without affecting their eligibility for government assistance.

Cons:

• Limits access to cash value: If your ILIT has a cash value component, it can be difficult for the trustee to access that cash to distribute to beneficiaries.
• Irrevocability: Once you establish an ILIT and transfer your life insurance policy to it, you cannot modify the trust or reclaim the policy.
• Complexity to establish: Creating an ILIT requires the assistance of an attorney to draft the document and ensure it complies with all legal requirements. You may also have to pay for ongoing administrative costs like trust management or tax filings.
• Funding requirements: After creating an ILIT, you need to continue paying life insurance policy premiums, which may impact your current cash flow and financial planning.