Irrevocable Life Insurance Trusts (ILITs) are Texas’s powerful estate planning tool. These trusts hold life insurance policies and distribute the benefits according to your wishes while minimizing estate taxes. There are four main reasons why ILITs are important:
1. ILITs Can Protect Against Changing Estate Tax Limits
ILITs involve three parties:
•Beneficiary or beneficiaries
The grantor places a life insurance policy in a trust managed by a trustee who distributes benefits to the heirs. Current law provides a generous $11.7 million individual and $23.4 couple exemption to estate taxes. However, these limits will expire in 2025 and revert to the prior levels of $5 million for individuals and $10 million for couples.
If your estate could exceed these more modest limits, an ILIT could be a critical estate planning option for you.
2. Limiting Estate Tax
One of the primary advantages of ILITs is their ability to limit estate taxes. When you transfer a life insurance policy into an ILIT, the death benefits are excluded from your taxable estate.
Grantors can use their gift tax exemption ($15,000) to pay the policy premiums. This technique allows you to remove assets from yourestate plan without incurring taxes.
3. Shield Against Legal Action
ILITs shield the life insurance proceeds from creditors and legal claims against your estate. The trust provides a secure and separate container for these funds.
4. Government Benefit Protection
If you have a special needs heir, ILITs can protect against exceeding asset limits for government benefits.
However, it’s essential to remember that ILITs are irrevocable. Once you create them, you generally cannot access the assets. Within these limits, an ILIT can help Texas estate planners guard against changes to exemption limits while preserving assets for heirs.