What it the difference between an Irrevocable Trust and a Irrevocable Life Insurance Trust. A Life Insurance Irrevocable Trust (ILIT) is a specific type of irrevocable trust designed to own and manage a life insurance policy. The primary purpose of an ILIT is to remove the life insurance policy from the insured’s taxable estate, helping to reduce estate taxes and provide liquidity for estate expenses or beneficiaries.
Key Features of a Life Insurance Irrevocable Trust (ILIT):
- Ownership of Life Insurance Policy: The ILIT owns the life insurance policy instead of the individual, preventing it from being included in their taxable estate.
- Irrevocability: Once created, the grantor cannot alter or revoke the trust.
- Estate Tax Benefits: Since the trust owns the policy, the death benefit is not counted as part of the grantor’s estate.
- Creditor Protection: In most cases, the assets in an ILIT are protected from creditors.
- Control Over Distribution: The trust can specify how and when beneficiaries receive the death benefit.
Difference Between an ILIT and a General Irrevocable Trust:
| Feature | Life Insurance Irrevocable Trust (ILIT) | General Irrevocable Trust |
|---|---|---|
| Purpose | Primarily holds a life insurance policy | Holds various assets like cash, property, stocks |
| Tax Benefits | Removes life insurance from the taxable estate | Reduces estate taxes but depends on asset type |
| Funding | Funded with life insurance policies or premium payments | Can be funded with different types of assets |
| Creditor Protection | Protects life insurance proceeds | Can provide protection depending on structure |
| Use of Funds | Provides a tax-free death benefit for heirs | Can be used for various estate planning goals |
Choosing Between the Two:
- If your goal is to exclude a life insurance policy from estate taxes and ensure efficient wealth transfer, an ILIT is the better choice.
- If you want to protect other types of assets or distribute wealth in a structured way, a general irrevocable trust may be more appropriate.
If you need help with an ILIT or irrevocable trust, please do not hesitate to contact De Varona Law at (561) 600-9070.
