If you are starting your estate planning process, an ILIT (irrevocable life insurance trust) will provide peace of mind. If you have young beneficiaries or sizeable estate, the trust will be able to provide control over a life insurance policy.

The irrevocable aspect of the trust ensures that the creator or the grantor will not be able to change it after it is setup. ILIT is primarily used as an estate planning and financial planning tool to protect assets subject to high estate taxes.

What Do You Need to Know About an Irrevocable Life Insurance Trust?

A revocable trust enables the grantor to make changes to the trust. You will also be able to end the trust if you want to. An irrevocable trust will not allow any changes to be made after it is setup. Only beneficiaries will be able to change the trust.

Revocable trusts are more common as they offer flexibility to the trust creator. An irrevocable life insurance trust is a good idea if you want to save taxes.

A grantor will set up the irrevocable trust and fund it. Transfers and gifts are then made to the trust. Transfers and gifts are permanent. Changes not allowed to the trust and its funds after set up.

The trustee manages the trust. Distributions made to beneficiaries are also managed by the trustee. The trustee who manages the trust is different from the grantor.

Benefits of an Irrevocable Life Insurance Trust

• Lower Estate Tax

Death benefits will not form part of the gross estate when you opt for an irrevocable trust. This means the benefits are not subject to federal and state estate tax.

The trust will also be able to cover debts and estate tax costs when the estate makes the purchases. The grantor will not be able to make the purchases as the estate is now part of the trust.

It is important to know that even though the estate is exempt from estate taxes, the beneficiary’s estate will be subject to such taxes. The tax burden shifts to the beneficiaries.

When ILIT is drafted properly, it helps provide liquidity. This will help pay estate taxes and other expenses and debts. It is done through a loan or purchasing assets from the estate of the grantor.

Lifetime gifts will help reduce the taxable estate. This is done by transferring assets into an irrevocable life insurance trust.

• Protect Assets from Creditors

An irrevocable trust will be able to protect you from certain legal proceedings. Protect assets from creditors by setting up the trust.

The creditors, however, will be able to attach distributions made from ILIT.

• Avoid Gift Taxes

The contributions by the grantor to the beneficiaries are considered gifts. If you want to avoid gift taxes, it is important that the trustee notifies the beneficiaries about the right to withdraw.

The letter notifies the beneficiaries right to withdraw for a 30-day period.

After the 30-day period, the trustee will be able to pay the life insurance premium using the contributions.

The transfer for the annual gift tax can be excluded as the letter makes the gift a present instead of future interest. This helps avoid the need to file a gift tax return.

• Leaving Assets to Minors and Ensuring Responsibility

Minors are not equipped to handle large amounts of money and assets. An irrevocable trust will allow you to put restrictions in place to protect the assets.

Restrictions such as the beneficiaries reaching a certain age to gain access to the assets can be put in place. The creation of a trust will help ensure responsible behavior from adults or minors with reckless spending habits.

The trust is supervised by an appointed trustee. The assets will be distributed as per the grantor’s wish. This provides asset protection for the beneficiaries.

As ILITs are not owned by the beneficiaries, the assets are protected even if there is future litigation involving the beneficiaries.

Linking the assets to the beneficiary is difficult. This prevents creditors from accessing the assets.

• Government Benefits

Trust beneficiaries receiving government aid (Medicaid or Social Security Disability Income) are protected with the proceeds received from a life insurance policy purchased by an ILIT.

The trustee will be able to control how trust distributions are used. This is done carefully so that it doesn’t obstruct the beneficiary’s entitlement to get government aid.

• Legacy Planning

The generation-skipping transfer tax stipulates a 40% tax on transfers and gifts in trust. The tax is also applicable when the gift or transfer is made to unrelated persons more than 37.5 years younger to the donor.

Related persons who are more than at least a generation young than the donor will also be covered as per the tax provisions. Donors gifting assets to grandchildren instead of children is a common example.

ILIT will help the grantor leverage the generation skipping transfer tax exemption. Gifts to the trust are used to fund and buy the insurance policy.

As the death benefits proceeds are excluded from the estate of the grantor, multiple generations of the family (children, grandchildren, and great-grandchildren) will be able to benefit from the trust assets.

Downsides to an Irrevocable Life Insurance Trust

• There are certain tax benefits that become applicable only when the grantor lives three or more years after transferring the insurance policy to the trust. IRS will start including the insurance proceeds if the period is less than that specified.

When ILIT purchases the insurance policy, you will be able to avoid a three-year period that is specified. The trust will have to fund to pay the premiums.

• When you give the trust money to a policy it becomes subject to the gift tax. The gift taxes can be avoided if beneficiaries are sent letters notifying them that the money is not immediately accessible to them.

• The biggest downside of ILIT is that it cannot be changed after it is established. You will have to relinquish complete control of assets. Apart from this dissolution of trust is not possible unless payment for premiums is not stopped.

• When the beneficiaries receive the estate, they will have to pay sizeable taxes.

How to Setup an ILIT?

Setting up an ILIT is a complex process. Start the process by selecting a lawyer specializing in estate planning.

Before you draft the trust document you will have to take the following decisions:

• Who will be the trustee of ILIT?
• Who will be the beneficiary or beneficiaries of the proceeds of the insurance?
• Will you be transferring an existing policy to the trust or buying a new life insurance policy?

Before you make these important decisions, it is advisable to give them a lot of thought. You will not be able to change any of these decisions after you set up an irrevocable trust.

ILIT is named as the beneficiary of the life insurance policy. This means the payment will go directly to the ILIT in the event of your death.

The beneficiaries will receive benefits without paying any estate or income taxes. Fund the trust for payment of the premiums. This ensures that the insurance policy doesn’t lapse.

Who Are the Beneficiaries of an ILIT?

The primary beneficiary of the insurance policy is ILIT. Death benefits are transferred into ILIT. These benefits are held in trust for the benefit of beneficiaries named in the trust documents.

If the proceeds of the trust are held for the benefit of the spouse, regular incremental payments are received instead of a lump sum amount. The incremental payments are not taxed.

What Are the Incidents of Ownership?

If the insurance policy is owned and retained by you, you will be able to change the beneficiaries or withdraw the cash value at any point. This means the tax authorities will include the proceeds of the insurance policy when calculating the estate value.

If the proceeds are high it will make the estate susceptible to estate taxes. This is possible when the estate is the beneficiary of the policy.

The policy will be an asset of the estate if it is owned at the time of death and even if children, grandchildren or great-grandchildren or someone else is named as beneficiary.

How to Dissolve an ILIT?

After an irrevocable trust is set up it cannot be undone. Premiums will need to be paid to keep the insurance policy in effect. If you want to dissolve the trust all that you need to do is to stop the payments for the premium.

The insurance policy will lapse if the premiums are not made.

Conclusion

An irrevocable life insurance trust is a good idea if you have a significant amount of assets and wealth and you want to protect it after you die. This will also help avoid creditors and high estate tax.

You do need to remember that ILIT may not be suitable for everyone. After you set up the trust, you will not be able to make any changes to it. Only beneficiaries of the trust will be able to approve any change to the trust.

Legitimate trusts are tools used by qualified estate planners and their clients to achieve certain objectives, including, but certainly not limited to, controlling the disposition of assets, avoiding probate, reducing administration costs, saving estate taxes, and preserving family wealth for future generations. Unfortunately, trusts are often used for improper purposes. Lurking in the shadows are con artists who promote sham trusts and trust scams for their own gain. These con artists rely on the ignorance of the public, and only education and information can prepare you for their pitch.

Sham trusts and trust scams are usually sold at high pressure seminars, by door-to-door salesmen, and on the internet. In some cases, they are recommended by well meaning but poorly informed CPA’s, financial advisors, friends, or business acquaintances. The marketing techniques can be persuasive, and are aimed at all classes of people.

What is a Sham Trust?

A sham trust is any trust created for an improper or illegal purpose. For example, “trusts” or “contracts” which purport to avoid, or significantly reduce, all taxes, including all income taxes, for individuals and, in some cases, businesses, are almost always sham trusts. These often use a complex structure that involves the “irrevocable” transfer of your assets to one or more business or trust entities which you control. The promoters claim that the arrangement will significantly reduce or eliminate state and federal income taxes.

Although there are legitimate estate tax objectives that may be accomplished with trust planning, income tax planning is quite a different matter. Generally speaking, someone is going to have to report taxable income, as well as pay income taxes thereon. While there are legitimate credits, deductions, and exemptions available under state and federal law, there is no trust or business entity into which you can convey all of your property and thereby avoid all income taxes. These trusts sometimes come with seductive names. Moreover, when the justification for the trust somehow involves the unconstitutionality of the IRS or of income taxes, you are best advised to seek additional or alternate legal counsel.

Another common illegal purpose for which sham trusts are marketed to the unsuspecting public is the avoidance of the claims of existing creditors. Most states have laws which make unlawful transfers of property to avoid existing or current creditors. These laws, often called fraudulent conveyance or transfer acts, ensure that persons do not transfer all of their property to a related person or entity in order to avoid claims. In addition, bankruptcy trustees have rights to property in contemplation of insolvency of a debtor, and to property transferred which prefers one class of creditor over another.

Although it is possible to protect assets from creditors, the creditors from whom you should protect assets must be future creditors. Moreover, asset protection trusts, and business entities all have issues that you will want to carefully consider. Giving all of your property to the trustee of an irrevocable trust, for example, even if that trustee is one of your children, involves risks that you must consider.

How To Recognize a Sham Trust

The name of the trust can often help identify the trust as a sham. Sham trusts have a variety of forms and names, such as “Freedom Trusts,” “Constitutional Trusts,” “Pure Trusts,” “Common Law Trusts,” “Unincorporated Business Associations,” “Business Trusts” (not to be confused with legitimate Massachusetts Business Trusts), and “Family Trusts” (not to be confused with legitimate revocable family trusts), and my personal favorite, the “Patriot Trust.” They often use combinations of names, such as “Pure Business Trusts.”

But the name may not always identify the trust as a sham. For example, an “Intentionally Defective Grantor Trust, ” sounds bad, but is a well accepted technique for “freezing” the value of your estate for estate tax purposes. So ask yourself if the purpose of the trust seems proper. If the trust seems too good to be true, it might be! For example, if the trust is promoted to avoid all income taxes, change nondeductible personal expenses into deductible business expenses, or redirect all, or most of, a person’s ordinary income into retirement savings, the trust may be a sham. If the trust is promoted to avoid all of the claims of creditors, including existing creditors and the government, the trust is likely a sham.

Your best protection from a trust scheme is the involvement of a legitimate attorney, licensed to practice law in your state. If you are referred to an attorney by another professional, it is always a good idea to verify that the attorney is licensed by your state Supreme Court to practice law. Most states keep disciplinary action against attorneys as public records available through state or local bar associations.

An additional information, consider the Martindale-Hubbell® Peer Review Rating,(TM) and the Martindale-Hubbell® Client Review Ratings,(TM) available here. Based upon self-reported professional credentials and other fact-based performance data, the Peer Review Ratings contribute to a comprehensive view of a lawyer, which can help you identify, evaluate and select the most appropriate lawyer for a specific task. Martindale-Hubbell® Lawyer Ratings serve as an objective indicator that a lawyer has the highest ethical standards and professional ability.

Similarly, you should request and verify the professional licensing of any advisor recommending or selling any investment, insurance, or annuity. The legitimate professional will encourage, rather than discourage your verification, and will facilitate your investigation by, for example, proving numbers for the state department of insurance, the SEC, Comptroller General, or the like.

Another way to determine the validity of the claims made by a trust promoter is to compare them to materials published by third parties in magazines, newspapers, and books. Materials that are used to sell sham trusts often contain incorrect references to the Constitution, references to court cases that have been overturned or changed by statute, and often cite scripture. An attorney will always be able to provide you with articles from popular or professional publications which discuss the use of legitimate trusts and business arrangements. In fact a professional will usually encourage you to have a greater understanding of the legitimate estate planning technique, and will never discourage you from learning as much as possible about the arrangement, or its costs and benefits.

Scam artists will usually discourage you from seeking additional information. They might suggest that the government conspires with the media to suppress truthful information that might support their claims. They might even suggest that the efforts of the government to shut down such scam artists proves how worried they are that the truth not come out! One con man successfully made such arguments to continue marketing his plans after being indicted for tax evasion!

They might even caution you against having your CPA or attorney review the documents they sell to you. They often say that CPA’s and attorneys simply do not understand them, or have a vested interest or bias against them. While it may be true that certain attorneys or CPA’s may dislike or have biases against legitimate estate planning techniques which they may not fully understand or appreciate, or with which they have little experience, no legitimate professional will discourage you from seeking additional advice or counsel. Moreover, it is a sign of confidence in the advice that an attorney is giving you that the attorney welcomes a second opinion, or agrees to provide documents for review by another attorney or trusted advisor.

Some con artists discourage your education by suggesting that you do it “now.” Beware of seminars where materials or services are sold only immediately following the presentation, especially if large groups of people literally run to the back of the room to purchase materials. It is well known that con artists will use “plants” or “shills” to encourage people to “go along” with the group by purchasing materials. The shills, and/or the promoter may even resort to making comments disparaging or embarrassing those few who do not go along. The bottom line is that there is no substitute for a professional service performed professionally. Legitimate professionals spend time to inform and educate their clients, as well as to learn the specific circumstances of their clients, so that an estate or financial plan is tailored to the needs and expectations of the client.

Risk of a Sham Trust

Trusts and business arrangements that are marketed as a way of avoiding all or a substantial amount of income tax are almost always illegal. The IRS considers these “abusive arrangements.” Any person who creates one of these trusts will, when caught by the IRS, have to pay all back taxes owed, interest, and penalties. Remember that failure to report or pay taxes upon income may be a crime. Criminal sanctions are often imposed upon all who participate in the promotion of abusive trusts, if they can be located. A transfer of real estate to a sham trust may result in a reassessment by the county appraiser, resulting in significantly greater property taxes. And, of course, usually the promoters of these trusts are long gone when you need assistance or get into trouble.

There are often incidental unintended costs and expenses associated with these sham trusts. For example, transfer of your real property to a sham trust may result in loss of a homestead exemption, or acceleration of your mortgage. You may learn too late that your insurance coverage no longer covers property transferred to a sham trust. The reality is that since these trusts are shams, they are not well thought out and conceived, and consequently there can be many unintended adverse consequences.

If You Think You May Have a Sham Trust

If you think you may have a sham trust, see an attorney immediately. Do not return to the person(s) who provided the trust until you have obtained an independent opinion that the trust or business arrangement is valid. Most estate planning attorneys will review your trust for a nominal fee; some will review the trust for free (although, there may be a nominal fee if you want a written legal opinion). The sooner that you learn whether your trust is legitimate, the better.

Proper estate planning requires consideration of your specific needs, goals, and circumstances. When performed correctly, by competent professionals, estate planning can accomplish much. When estate planning is done incorrectly, or for improper purposes, much may be lost.

Trust is one of the most important aspects in a relationship when you are looking for a long term commitment from your partner. When a guy asks you to trust him, it is a positive sign as it means that he wants to make his relationship with you stronger and secure. Read on to know what it actually means.

He wants you to feel secure

He is asking you to trust him to make you feel secure in a relationship so that you are confident about him and your relationship. He wants you to know that he will not betray your trust at any time.

He is working to make the relationship stronger

When a guy asks you to trust him, it shows that he is looking for a lasting relationship with you. He is telling you that he wants to forge a bond that can weather all storms and make the relationship stronger. It is a good sign and he may see you as his life partner in near future.

He wants you to believe in him

Trust is the basis of a healthy and happy relationship; he wants you to know about his faithfulness and that he values integrity and honesty. That there may be temptations galore but he is loyal to you. He is asking you to have confidence in him and that he will not do anything to sever that trust.

He cares for you

He is asking you to trust him because he cares for you and loves you and will not do anything to let you down or make you unhappy. He wants you to know that you can count on him for his support and that he is there for you always.

He wants you to give him space

When you are trusting of your guy you are not suspicious of his every move and do not feel threatened if he wants to spend his free time with friends. Trust also means allowing him his space without over reacting so that he does not feel guilty of the time he spends away from you.

He wants to share things with you

When there is trust the relationship is comfortable and you are open to share the intimate details with your guy. He is conveying to you the need for open communication from both the sides where you can be free to voice your concerns and opinion.

He is trying to ascertain his feelings

When he is asking you to trust him he wants to know the depth of your feelings as when there is love you are willing to trust your partner and he too is reciprocating by trusting you.