An irrevocable life insurance trust, or ILIT, is a popular estate planning tool in Texas that allows people to pass on their life insurance policy to their heirs without having to pay estate taxes. However, there are some pros and cons to consider based on your unique circumstances before deciding whether it is suitable for your family or not.
Advantages of an irrevocable life insurance trust
Most people customarily create ILIT to reduce the amount of estate taxes their loved ones would pay after they pass. Although life insurance death benefits are not typically taxable in Texas, they can be included as part of your estate if you have assets worth $12.06 million or more. This means your beneficiaries will have to pay up to 40% of your estate’s value in taxes when you die. However, with an irrevocable life insurance trust, the life insurance policy will be owned by the trust and not by you, so it won’t be considered part of your estate, consequently avoiding death taxes.
Another advantage of an irrevocable life insurance trust is that it can provide liquidity to your estate. This means that if you have other assets subject to probate, the life insurance death benefit can be used to pay off any debts or expenses related to the probate process. This can help your heirs avoid having to sell off other assets to settle your estate.
Disadvantages of ILIT
ILITs are irrevocable, meaning you must give the trustee total control of your insurance policy. You won’t be able to revoke it or change the terms of the trust ever. This can be a disadvantage if your circumstances change and you need to access the cash value of your life insurance policy or make changes to the beneficiaries.
Another potential downside of an irrevocable life insurance trust is that it can be a complex estate planning tool to use. Any mistakes or failure to adhere to federal and state laws can have your insurance policy pulled into your estate.
Just about anyone in Texas can reap the benefits of setting up an irrevocable life insurance trust. However, it is particularly beneficial for those with a large estate who want to minimize their taxes and provide liquidity to their heirs.