Irrevocable Life Insurance Trusts In Virginia (ILIT)

Overview

     An Irrevocable Life Insurance Trust, commonly referred to as an ILIT, is an effective estate planning tool for high-net-worth individuals. An ILIT is created to own a life insurance policy for the benefit of the designated beneficiaries and can help reduce estate taxes.

Funding of an Irrevocable Life Insurance Trust (ILIT)

     As its name suggests, an ILIT is funded with a life insurance policy on the grantor’s life. It can either be funded with a preexisting policy, or with funds transferred to the ILIT by the grantor to pay the premium on a new policy owned initially by the ILIT. In either situation, the ILIT itself is the owner of the policy and distributes proceeds upon the grantor’s death to the beneficiaries of the ILIT, or the proceeds are held and administered in the ILIT pursuant to the ILIT’s terms.

Crummey Provisions

    In many cases involving ILITs, premiums continue to be paid on a regular basis if the policy is not “paid up”. Crummey provisions refer to certain withdrawal rights that beneficiaries of the ILIT have when funds are transferred into the ILIT for payment of the premiums. When the grantor pays funds into the ILIT to pay the premium on the life insurance policy, the beneficiaries have a certain amount of time, usually 30 days, to withdraw a certain portion of the funds paid into the ILIT. The exact amount will depend on the amount of the premium and the specific provisions of an ILIT.

     Crummey provisions allow the grantor of an ILIT to utilize their Annual Gift Tax Exclusion. If a beneficiary chooses to withdraw their portion of funds paid into an ILIT, the grantor can claim it as a gift for tax purposes without incurring potential gift tax liability. However, in most cases, beneficiaries will not exercise their right to withdraw the funds due to the long-term benefits of leaving assets in the ILIT, and the grantor will not have enough money in the ILIT to pay the required premium if the funds are distributed to the beneficiary.

Limiting Estate Taxes

     Life insurance policies held in a person’s name are subject to estate taxes upon that person’s death. However, if the life insurance policy is owned by an ILIT created by the grantor, it is not subject to estate taxes. It also provides the opportunity for any estate taxes that exist to be paid from the proceeds of a life insurance policy in an ILIT, which is a big advantage considering that many estate assets are not easily made liquid. Further, an ILIT can be structured to protect the beneficiaries from creditors. 

Conclusion

     An Irrevocable Life Insurance Trust (ILIT) is a great estate planning tool for high-net-worth individuals that are over the estate tax limit. It allows them to hold a life insurance policy that is otherwise includable in their taxable estate, but is still held for the benefit of the designated beneficiaries. Smith Strong, PLC’s team of estate planning attorneys are happy to discuss your options. Please call us at (804) 325-1245 to schedule a consultation, or attend one of our free estate planning workshops to receive the benefit of a free, private consultation.

Special thanks to Owen Togna for editorial assistance in drafting this article.