Irrevocable Life Insurance Trust (ILIT)

[cuttingedgens]

I have a few quick questions about "Irrevocable Life Insurance Trusts" (ILIT) -


1> Correct me if I'm wrong, but my understanding is that in order to take full advantage of the tax benefits of setting up an ILIT, the ILIT would need to be the *owner* AND *sole beneficiary* of my life insurance policy. Is this true?


2> As I also understand it, upon setting up my ILIT a trustee would be assigned. This trustee would at the time of my death execute the distribution of insurance proceeds to the beneficiaries specified in my trust. My question is, are the instructions / specifications of my trust disclosed to the life insurance company upon signing up my policy?


3> Am I allowed to specify in my trust that I want some of my death benefits to be distributed to a Charitable Foundation and some to be distributed to my LLC family business? Or can the distribution of funds only be to individual people?


4> If the insurance company *does* get a copy of my trust instructions for beneficiary distribution, can the insurance company contest the insurable interest of those beneficiaries I specify within my trust... and thereby deny the issuance of my policy? I suppose if the insurance company does not get a copy of my trust distribution instructions, this is a moot point.


Thanks in advance for the help!

 

[scagnt83]

1> Correct me if I'm wrong, but my understanding is that in order to take full advantage of the tax benefits of setting up an ILIT, the ILIT would need to be the *owner* AND *sole beneficiary* of my life insurance policy. Is this true?

That is correct.
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2> As I also understand it, upon setting up my ILIT a trustee would be assigned. This trustee would at the time of my death execute the distribution of insurance proceeds to the beneficiaries specified in my trust. My question is, are the instructions / specifications of my trust disclosed to the life insurance company upon signing up my policy?

It depends on the company and their individual policies.

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3> Am I allowed to specify in my trust that I want some of my death benefits to be distributed to a Charitable Foundation and some to be distributed to my LLC family business? Or can the distribution of funds only be to individual people?

I think, but am not certain, that it must be individuals. (obviously with insurable interest)
But there might be an exception for a FLP (family limited partnership)... but most likely it would make more sense for the FLP to just own the policy directly.

If you want the LLC to get the funds then you should just have the LLC as owner/bene of the policy.

If you want to gift to a charity you should use a Charitable Remainder Trust.



If you want to have all 3 of the above as beneficiaries, you really need to have 3 different policies.
One for the ILIT, one for the Charitable Remainder Trust, one for the LLC (owned by LLC, bene as LLC).

There is no real advantage to have the LLC wrapped up in the ILIT that I know of. The LLC can own the policy, Cash Values grow tax deferred, Cash Values are accessed tax free, and it receives the Death Benefit tax free. So unless there is a controlling interest within the LLC that you do not trust with the ownership of the policy then I cant think of a reason to wrap it up in the ILIT (if it is indeed possible to do so). I also am not sure what the rules are on trust proceeds going to a business... it could possibly trigger some type of taxes.

You really need to ask the trust specific questions to a good Estate Planning Attorney... probably want a good Tax Attorney involved too, along with a knowledgeable insurance agent.
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4> If the insurance company *does* get a copy of my trust instructions for beneficiary distribution, can the insurance company contest the insurable interest of those beneficiaries I specify within my trust... and thereby deny the issuance of my policy? I suppose if the insurance company does not get a copy of my trust distribution instructions, this is a moot point.

They will most likely want a copy or at least a list of the beneficiaries. But as I said before it depends on the individual carrier.

And yes, if they can certainly deny issuing the policy if they feel there is no insurable interest.

 

[BNTRS]

Regarding the questions related to seeing the beneficiaries and insurable interest:

Most insurers will have a trust certification process. The actual process varies by company. For some, it's simply a form that asks for the Trust's name, date of inception, and TIN. For other companies they want a copy of at least the first page of the trust while others will request a copy of the entire trust.

As far as ILIT'a are concerned, you are generally proving insurable interest through the need for estate liquidity. If the intention is instead to move money out of your estate and leave to someone or something, an ILIT might look a little weird to an insurer. However you might be able to get them to agree to the need as a charitable gifting strategy where you already have one mechanism to do this, and would rather not pay money to create another. This is very iffy.