An irrevocable trust in Tennessee may be one good way to avoid probate litigation. It can also reduce estate tax liability and increase the boon to beneficiaries at the same time. If planned poorly, however, an Irrevocable Life Insurance Trust (ILIT) can backfire. An ILIT is a type of life insurance policy in the name of a trust rather than an individual. Like any other trust, a trustee controls the money and pays it to a beneficiary according to the trust maker’s direction.
Benefits of ILITs
A trust maker determines the fate of the money when establishing the trust and generally cannot alter this fate later. Since the trust owns the policy, it is no longer a part of the estate, meaning it is exempt from probate. Because of this, an ILIT can also reduce estate tax liability and keep creditors from claiming these finances after death. Trust makers must be careful, however, when naming a beneficiary. If the estate itself is the beneficiary of a trust, these benefits will not apply.
An ILIT can also give trust makers greater control over the distribution of their estate. When creating the trust, makers can choose not only how much to allocate to each beneficiary, but also dictate the amounts and frequency of installments based on timing, achievements and life events–almost without limits.
Pitfalls of ILITs
It’s important to consider a few things when planning an ILIT. Gift taxes will apply unless installments are below exemption amounts. Trust makers wanting to give in excess of the current amount may find it helpful to talk to a lawyer when navigating legal options. Choosing a trustee is another momentous decision, as this person will have control over how the trust funds are disbursed.
Large sum installments have other drawbacks for beneficiaries receiving government benefits. Large payments can disqualify them from certain benefits, like food stamps or Medicare. Keeping the money in the trust and paying beneficiaries in smaller installments can help prevent this disturbance. Another way to avoid disrupting benefits is to dictate specific uses for the money.
An ILIT is irrevocable. After creating a trust, the trust maker cannot transfer the money back to their estate. Those who may want to reclaim assets in the trust should consider other options, such as a standard life insurance policy or a revocable trust.