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Life insurance offers you the opportunity to help prepare loved ones who depend on you financially. Specifically, the death benefit in a life insurance policy can help provide your family monetary protection amidst a devastating loss if you were to pass.
When choosing a policy and naming a beneficiary, you can make certain decisions that can yield even more support, like creating an irrevocable life insurance trust (ILIT). Some people may refer to these as ILIT trusts or ILIT life insurance.
Before we dive in, it’s important to note there are two common kinds of life insurance, term and whole life. Whole life insurance is a type of permanent plan because it lasts the policyholder’s entire life, while term life insurance lasts for a specific number of years.
In a whole life insurance plan, the beneficiary receives the death benefit regardless of when they pass. On the other hand, term life insurance payouts only happen if the policyholder passes within the set term length.
To receive life insurance benefits, a policyholder must pay regular premiums, and when they pass, their beneficiary will receive a death benefit. However, there are a few decisions you can make to protect your loved ones.
An estate tax is a tax based on the total value of assets in one’s estate. The specific percentages vary from state to state, but federal estate taxes kick in when one’s estate is more than $12.92 million.1 When you inherit a death benefit after someone passes, this sum is included in the overall value of the estate and can tip it over the threshold.
One of the best ways to help protect yourself from estate taxes after inheriting the death benefit in a life insurance policy is setting up a life insurance trust and naming the ILIT as the beneficiary in your plan.2
A life insurance trust (ILIT) is a legal agreement where a life insurance policy is placed into a trust, removing it from the grantor's estate to provide asset protection, estate tax benefits, and control over the distribution of proceeds. An ILIT requires a grantor, trustees, and beneficiaries to work correctly. Usually, the grantor is the person who creates the life insurance trust, or ILIT, and pays for the life insurance premiums. Then, the grantor relinquishes the life insurance trust control to the trustees. From there, the trustees ensure that the beneficiaries can receive the assets living in the trust.2
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
One of the main benefits of setting up an ILIT is preventing certain taxes that can come when handling large sums of money. Let's explore some of these life insurance trust advantages more in depth:
In an ILIT, the grantor pays for life insurance premiums and contributes additional income into the cash value of the plan to benefit beneficiaries in the future. In this situation, the contributions to the life insurance trust "could be considered a gift.
However, gifts are only taxed if they are intended to benefit someone in the future. In this case, the life insurance trust (ILIT) is actively being used to pay premiums, so it is not considered a gift.2
It’s important to understand that the death benefit amount becomes a part of the policyholder’s estate value when a policyholder passes. Specific laws facilitate how the gross estate value is taxed and accessed. Setting up an irrevocable life insurance trust (ILIT) can keep the death benefit separated from your estate value, protecting it from additional taxes.2
Suppose the beneficiary in the life insurance trust is receiving government assistance via disability or Medicaid. In that case, the life insurance benefits must be received in a way that does not disturb the government’s help.2
For example, if the death benefit was paid in full immediately, the beneficiary may be forced to surrender the government assistance. With an ILIT, there is more control over how and when money is distributed to beneficiaries.2
Another valuable benefit of ILITs is mitigating the generation-skipping transfer tax. Usually, the IRS can tax up to 40% of gifts to people over 37.5 years younger than the gift giver. This tax is not possible within an ILIT, allowing grantors to help prepare grandchildren listed as beneficiaries financially.2
An irrevocable life insurance trust (ILIT) and a revocable life insurance trust (RLIT) are both estate planning tools designed to manage life insurance proceeds efficiently, but they differ in terms of flexibility and control. With an ILIT, the grantor relinquishes control over the trust assets, including the life insurance policy. This means that the terms of the ILIT can’t be changed, and the grantor can’t reclaim the assets.
On the other hand, a RLIT allows the grantor to maintain control over the trust assets, including the ability to modify or revoke the trust. While RLITs offer greater flexibility, they don’t provide the same level of asset protection and estate tax benefits as ILITs. Additionally, assets in an ILIT are typically shielded from creditors and estate taxes, making it a more robust tool for long-term wealth preservation.
To set up a life insurance trust or ILIT, you must determine who you’d like to be involved. You’ll have to choose who the grantor, trustees and beneficiaries are. We recommend working with a financial or estate planner to iron out the details in your irrevocable life insurance trust.
Aflac does not set up irrevocable life insurance trusts, but you can build an ILIT into one of our term or whole life insurance plans. Both of our plans are affordable and comprehensive, and you can take them with you wherever you go. Chatting with an agent can help you determine which option makes more sense for your coverage goals.
1 Investopedia - Estate Tax Definition. Updated January 18, 2023. Accessed January 30, 2024. https://www.investopedia.com/terms/e/estatetax.asp.
2 Investopedia - 7 Reasons for an Irrevocable Life Insurance Trust (ILIT). Updated January 05, 2023. Accessed January 30, 2024. https://www.investopedia.com/articles/personal-finance/092315/7-reasons-own-life-insurance-irrevocable-trust.asp .
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
This is a brief product overview only. Coverage may not be available in all states. Benefits/premium rates may vary based on plan selected. Optional riders may be available at an additional cost. Plans and riders may also contain a waiting period. Refer to the exact plans and riders for benefit details, definitions, limitations and exclusions. For availability and costs, please contact your local Aflac agent/producer.
Life (A68000 Series) - In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400. Term and Whole Life (B60000 Series) - In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Group Whole Life (Q60000 Series) - In Arkansas, Delaware & Oregon, Policy Q60100M. In Idaho Policy Q60100MID. In Oklahoma, Policy Q60100MOK. In Texas, Policy Q60100MTX. Group Term Life (Q60000 Series) - In Delaware, Policies Q60200M. In Arkansas, Idaho, Oklahoma, Oregon & Texas, Policies ICC18Q60200M, ICC18Q60300C, ICC18Q60400C.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.
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