An irrevocable life insurance trust (ILIT) is one of many ways that you can ensure your heirs benefit when you pass away. These trusts, as the name implies, can't be revoked unless you and all the beneficiaries agree to do so. To understand more about these trusts and why they can be a good estate planning option, read through this guide.
Why would one choose an irrevocable trust?
An irrevocable trust has one key benefit over other estate disbursement options—it cannot be changed upon a whim. Since it requires you and everyone that benefits to agree on any changes, this means that your final wishes will likely be carried out as you planned. No one can take advantage of, for example, your failing mental condition as you age to change the trust to their benefit.
Couldn't you simply gift the money now?
A life insurance trust means that you own life insurance policies, as opposed to having the cash outright. Although you could cash in the policies and divvy up the proceeds, it would mean that you have lost all access to this asset in event you need it in the future. A trust also ensures that the proceeds from the insurance policies are passed out as you determined. For example, if trust funds are earmarked for a grandchild's college expenses, they cannot be used for anything else.
Who manages the trust?
Trustees are set up to manage your trust, both while you are alive and once the trust begins paying out to the beneficiaries. Although it is isn't uncommon to allow an adult child or other family member to be the trustee, it can be wiser to bring in an outside ILIT management firm. The problem with a family member running the trust is that other beneficiaries may have some distrust that there could be favoritism, even if this isn't possible with the way the trust is set up. A management firm is prepared to deal with family members that may be less than happy with the trust outcome, plus they have no emotional ties to anyone else involved.
How is the trust distributed?
You have a lot of choice in this matter. At the time of death, the trustee will cash in the insurance policies. If you decided on immediate disbursement, the payments will be made as you directed when setting up the trust. The other option is for delayed disbursement. In this case, the proceeds from the insurance are invested and then dividends and payments are made at the intervals you decided upon. These could be at certain ages or even life stages. For example, you may decide that everyone gets a disbursement when they turn 18, along with a secondary disbursement to offset wedding or college costs when applicable.
For more help in setting up your trust, contact an ILIT management firm (like Crummey Service) in your area.