The ILIT trust is a great tool used to minimize both estate and income taxes. An additional benefit of an ILIT trust is that if someone owes estate taxes upon their death, the money in the ILIT can be used to pay those taxes so property that is in the decedent’s estate won’t be need to be sold to pay the taxes.
Many times people leave special property behind for their family and they don’t want that property sold to pay taxes. The ILT is appropriate for those who currently, or in the future, anticipate having an estate that will have estate taxes due.
How does it work?
The grantor creates an irrevocable trust (a trust that can’t be altered) and each year funds the trust with a specified dollar amount. The grantor names a trustee who uses the money to purchase a life insurance policy on the life of the grantor. When the grantor passes away, the proceeds of the life insurance policy pass to the grantor’s beneficiaries, free of estate and income tax. In addition, the proceeds are protected from creditor claims of the grantor.