The following are factors to consider when deciding whether an irrevocable life insurance trust makes sense for your client:
- An ILIT provides greater flexibility
in handling distributions of the proceeds and income than would be possible under simple insurance settlement options. Contingencies such as divorce, remarriage, children of a second marriage and other events may be anticipated and provided for.
- Because it may hold multiple policies,
an ILIT permits coordination of the distribution of the proceeds of different policies.
- If estate liquidity is the goal,
the ILIT trustee should be authorized and empowered (but not directed) either to voluntarily lend trust principal to the grantor's executors or to the executors of the grantor's spouse or to purchase assets belonging to either of their estates.
- If an ILIT makes sense,
the insured should never be the trustee; the insured should assign all rights to the policy to avoid retaining any incidents of ownership.
- To take advantage of the annual exclusion for gifts
of a present interest, trust beneficiaries should be given some present right in the trust (Crummey powers).
- To qualify for a marital deduction
if the grantor of the trust dies within three years of policy transfer to the trust, the grantor's estate should be empowered to pay insurance proceeds to the grantor's spouse or to a trust established for the spouse's benefit.
