A California irrevocable life insurance trust (ILIT) is an estate planning option. The ILIT is a trust funded by one or several life insurance policies. Once you create the terms of the trust, you can’t change it because an ILIT is irrevocable.
Estate planning can become complicated. It’s sometimes overwhelming trying to decide what’s best for your situation. If you’re interested in an ILIT, it helps to consider the pros and cons of such a trust.
Perhaps the most beneficial part of having an ILIT is that the funds from your life insurance aren’t considered a part of your estate. And the funds aren’t counted when the IRS assesses your estate for federal estate tax purposes. An ILIT also gives you more control over the use of the death benefit. Although the benefit only becomes available after death, you can control its use.
Putting your life insurance in an ILIT can ensure that estate taxes and other expenses are paid after you die. Usually, you’d choose a beneficiary to receive the funds from your life insurance. But that beneficiary can spend the money on anything.
With an ILIT, the money from the life insurance will serve a specific purpose. That could keep your family from having to sell assets in order to pay expenses related to the estate.
Perhaps the biggest risk associated with an ILIT is you have no access to any policy in the trust. Usually, you can borrow money from your life insurance policy. But when you have an ILIT, you cannot use any policy in the trust for your personal use.
Like with most things, there are negatives and positives to consider. After careful thought, you might decide that an ILIT is perfect for your estate planning purposes. However, you may also decide to pursue other options.