The basics of ILITs in Arizona

When it comes to estate planning, there are a few different options available to you. One of those options is an irrevocable life insurance trust, or ILIT. This special type of trust has many benefits, including estate and tax savings.

What is an irrevocable life insurance trust?

An ILIT is a type of trust that you create in order to hold your life insurance policy. You can transfer the ownership of the policy to the trust. This is important because it allows you to avoid estate taxes on the death benefit from the life insurance policy.

In addition, by putting the life insurance policy in a trust, you can shield it from creditors. This is especially important if you have a high net worth and are concerned about potential creditor claims.

This type of trust is irrevocable, which means that you cannot change the terms of the trust after its creation. This is important because if you were to change the terms or revoke it, your estate can be subject to estate taxes.

How does an ILIT work?

When you create an ILIT, you transfer one or more life insurance policies to the trust. You then make annual, tax-free gifts to the trust. The trustee can then use those funds to pay your life insurance premiums.

You’re allowed to make annual estate tax-free gifts without having it count against your estate for estate taxes purposes when you die. Therefore, if you have a spouse and three children who each inherit $100,000 from a life insurance policy that was in an ILIT, estate taxes may not be owed.

Because the trust is irrevocable and you do not maintain ownership of the assets in it, those assets are no longer included in your estate when you die. This can help reduce estate taxes significantly and allow more funds to get transferred to your estate beneficiaries.

An ILIT is not for everyone. However, if you’re concerned about estate taxes and you want to protect your life insurance policy from creditors, an ILIT may be a good option for you.