Individuals beginning the estate planning process in California may have heard about a component called an irrevocable life insurance trust but may not know what it entails. This can help you leave your wealth to your heirs, but is it right for you?
What is an irrevocable life insurance trust?
This trust is funded during your lifetime with one or more life insurance policies. As with irrevocable trusts, you generally can’t change it once you establish it. Benefits of these trusts include:
-Avoiding your policy death benefit included in your estate for tax purposes
-Ability to direct how your policy death benefit is used
-Funding estate taxes and other expenses after you die to avoid having to sell a business or other high-value assets
ILITs don’t entirely wipe out estate taxes, so you may still have concerns depending on your estate’s size. You may also have to deal with a state tax, but the death benefit may pay those taxes.
Other advantages include:
-Possible tax-free death benefits that shields heirs from probate and other complications
-Inheritance protection for a minor child
What is right for my situation?
Obviously, you have no idea what the future may bring for you. Nevertheless, you might want to use ILITs and other trusts during the estate planning process. Dealing with trust administration can be complicated, so make sure you understand the implications and advantages of each type of trust.
Generally, once you set up an ILIT, you can change it. However, it can still be an excellent way to leave money to a child with special needs or someone else who may not have the ability to handle the funds on their own Weigh all your options before settling on creating an ILIT or other trusts.