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Protecting Your Life Insurance Policies

by | Nov 18, 2021 | Estate Planning

If you have begun to plan for retirement you may own one, or several, life insurance policies. Unfortunately, depending on how these policies are set-up, the proceeds from them may be counted as part of your estate once you are gone.  In some cases, insurance proceeds can make it necessary to take an estate through probate or even cause estate and/or inheritance taxation.  Improperly set-up insurance policies may also jeopardize government benefits for both you and your beneficiary.

Irrevocable Life Insurance Trusts, or “ILITs”, provide a way to make sure that your life insurance policy is being distributed the way that you desire, without unfortunate tax consequences or disqualification from government benefits.  Despite their benefits, Irrevocable Life Insurance Trusts are one of the most underutilized estate planning techniques, possibly because ILITs are not as commonly known as other types of trusts.

Life Insurance Policy

An Irrevocable Life Insurance Trust is created to own and control a life insurance policy while the insured is still living, as well as manage and distribute the proceeds upon the insured’s death. There are several rules concerning ILIT’s, and this may be why some estate planning attorneys do not employ them extensively.  However, the potential benefits make dealing with the rules worthwhile.  Here are some of the benefits:


Minimize Estate & Gift Taxes

Any life insurance policies held by an ILIT are NOT counted as part of the insured’s estate and therefore will not be subject to state and federal estate taxation (Indiana currently has no estate tax).

In 2021, a single person can give $15,000 a year to another person and $11.7 million throughout their lifetime without triggering a gift tax return or additional taxes. Policies held in an ILIT will not count toward your lifetime or yearly gift amount.

Government Benefits

Without an ILIT, a beneficiary who is receiving government benefits may be disqualified from receiving those benefits upon receiving a lump insurance payout. With an ILIT, the insured person can carefully control incremental distributions to their beneficiary, thus preventing the beneficiary from exceeding the income limits required to receive their benefits.

Asset Protection

ILITs can protect insurance policies from creditors, whether a creditor of the insured or a creditor of the beneficiary. Although creditors can attach to distributions from the ILIT, they cannot attach to the entire policy.

Flexible Distributions

Arguably the most beneficial reason for creating an ILIT is that the insurer can control distributions to beneficiaries. Normally, a life insurance policy would give beneficiaries one lump sum. That is not always the best scenario for everyone, whether it be because of government benefits or the age of the beneficiary. ILITs can incorporate distributions upon certain milestones such as graduating from college or technical school or getting married instead of one lump insurance payout at the time of death.

Irrevocable Life Insurance Trusts can be powerful tools for wealth management and estate planning. Chances are, you already have at least one life insurance policy that you’ve worked hard to obtain. Why not ensure that your policy benefits go to your loved ones without government intervention? Contact our office to discuss how an ILIT could benefit you and your beneficiaries.