Often asked: How To Fund An Irrevocable Life Insurance Trust?

Gifting cash or other assets to an ILIT is a common and simple funding method. In addition to lifetime exemption gifts, in 2019, each individual has the ability to give an annual gift of $15,000 (indexed for inflation) to another individual each year without incurring any gift taxes.

Can you loan money to an Ilit?

Or, the insured may loan money to the ILIT so the trustee can repay the loan, or make annual gifts to pay loan interest. Alternatively, the ILIT can accrue the loan interest, which is added to the loan balance. Both the accrued interest and the loan balance will be included in the insured’s taxable estate.

How much can you contribute to an Ilit?

Gift Taxes When you contribute cash to the ILIT for the ILIT to pay the premiums, that is a gift. Properly structured, you can contribute up to $13,000 per person (or as much as $26,000 per person if you are married), per year free of gift taxes. Special steps must be followed to avoid gift taxes on these transfers.

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Can you contribute to an irrevocable trust?

The IRS allows you to give a certain amount of money every year to anyone you want, tax-free. This means you can put up to that much money in your irrevocable trust without having to pay any gift tax on it. When you die, your heirs receive the money — and any growth that it enjoys — tax-free as well.

Are distributions from an irrevocable life insurance trust taxable?

An irrevocable life insurance trust is often used to set aside assets for certain purposes, such as paying estate taxes, because these assets themselves are not taxable. If properly structured, the death benefits paid to the ILIT will be free from inclusion in the gross estate of the insured.

Is interest on premium financing tax deductible?

Interest on a premium financing loan is generally not deductible for income tax purposes by individuals, as it is classified as personal interest.

Who pays Ilit tax?

If the IlIt is a grantor trust under sections 671 through 677, the grantor- insured is taxed on trust income and loss. IlIts will qualify as grantor trusts if income may be distributed to or accumulated for the grantor’s spouse, or may be used to pay life insurance premiums. I.r.C. § 677(a).

Does an Ilit need an EIN?

The account should be used for the annual gifts made to the ILIT (generally in the amount of the insurance premiums). However, in some instances a bank or insurance company may insist upon the ILIT obtaining a separate EIN, in which case the trustee can complete and submit IRS Form SS-4 to obtain a separate EIN.

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Who can fund an Ilit?

2. Who can serve as an ILIT trustee? The trustee of an ILIT can generally be anyone other than the insured, although naming an “independent trustee” may offer greater flexibility for estate planning.

What assets can you put in an irrevocable trust?

Frankly, just about any asset can be transferred to an irrevocable trust, assuming the grantor is willing to give it away. This includes cash, stock portfolios, real estate, life insurance policies, and business interests. Of course, some assets are better to place in trust than others.

Who can add money to an irrevocable trust?

Because of this, irrevocable trusts can also be used to reduce estate taxes. Grantors can add additional money to the trust each year, up to the gift-tax exclusion amount, to pass money to heirs without paying estate tax.

Who owns an irrevocable trust?

Under an irrevocable trust, legal ownership of the trust is held by a trustee. At the same time, the grantor gives up certain rights to the trust.

What is the primary purpose of an irrevocable life insurance trust?

An irrevocable life insurance trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive, as well as to manage and distribute the proceeds that are paid out upon the insured’s death.

Can a spouse be trustee of an irrevocable life insurance trust?

As mentioned above, a surviving spouse can serve as trustee of the ILIT after the insured/Grantor’s death and still receive income from the trust and also monies for his or her health, education, and support. In addition, the surviving spouse may withdraw up to five (5%) percent of the principal per year.

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Can an irrevocable life insurance trust be terminated?

Even an irrevocable trust can be revoked with a court order. A court may execute an order that permits the dissolution of a life insurance trust if changes in trust or tax laws or in the grantor’s family situation make the life insurance trust no longer serve its original purpose.

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