Bay Area Estate And Tax Planning Law Firm

An Irrevocable Life Insurance Trust in California

On Behalf of | Nov 28, 2022 | Blog, Estate Planning |

A life insurance trust could be essential to a California estate plan. When someone purchases a life insurance policy, they likely hope the payout will help the beneficiaries deal with financial concerns after losing a supportive loved one. However, tax implications and other issues could weigh on the planner’s mind, leading the person to devise an Irrevocable Life Insurance Trust (ILIT).

Opting for an ILIT

With an ILIT, the grantor no longer owns the policy. Instead, the trust owns it, and duties related to the policy fall under the management of the trust’s trustee. Standard life insurance policies placed inside a trust include term life or universal insurance policies.

When a grantor has a substantial net worth, there could be federal estate taxes owed by the estate. Any money diverted from the estate to the tax debt could mean less money the beneficiaries receive. An insurance policy may become subject to taxes, as well. By moving the insurance policy into a trust, tax issues might not be a concern anymore.

A benefit to a trust

Since a trustee manages a trust, the trustee could follow the grantor’s wishes regarding funds in the trust. However, serious worries might arise about how a beneficiary will handle the insurance money. A trustee might work the payouts so that beneficiary does not receive a lump sum and mismanage the funds.

Several reasons may lead someone to devise an ILIT during estate planning in California. For example, some may worry about the funds’ impact on Medicaid or other government-related assistance based on assets.

Creating an irrevocable life insurance trust may require careful and deliberate steps taken well before an estate is distributed. However, those hoping the trust allows the life insurance payouts to serve a beneficiary better might find the effort of putting one together worthwhile.