16th Sep 2014

So you have this thing called an ILIT or Irrevocable Life Insurance Trust.   You know it has something to do with insurance, gifts, and keeping insurance proceeds out of your estate.  But in truth, you really have no idea how the thing is supposed to work.  Here it is ILIT 101: The Basics.

Vocabulary:

Trust – The entity that holds the insurance as owner, pays premiums, and distributes policy proceeds (as per terms of the trust agreement).  It is essential that the trust and trustee (not the Grantor) does these things to keep the insurance policy out of the Grantor’s estate.

Trust Agreement – The document that governs how the trust works, who can act for the trust, and who receives distributions and how.

Grantor(s) – The person (s) who creates the trust and wants to keep the insurance out of his and/or her estate.

Trustee(s) – The person or entity (such as a trust company) that is in charge of managing the trust.  It is never the Grantor and often is not a beneficiary.

Beneficiary/Beneficiaries – The person or entity that receives the benefit of the trust, usually spouse and/or children. Not to be confused with the insurance beneficiary.  That is the trust.

Crummey Letter/Withdrawal Letter – The letter the trustee sends to the beneficiary when a gift is made allowing the beneficiaries to withdraw the gift for a specific period of time (usually 30 to 45 days).

Step 1:  The Trust is created when the grantor and trustee sign the trust.

Step 2: Life insurance policy is purchased in the name of the trust or an existing policy is tranferred to the trust.

Step 3: Grantor gifts the premium payment to the trust.

Step 4: Trustee issues Crummey letters to beneficiaries when payment is received.

Step 5: Trustee waits until Crummey period is finished and pays the premium.

Step 6: When Grantor is deceased, Trustee collects insurance proceeds.

Step 7: Trustee manages the trust for the beneficiaries according the terms of the trust.

Step 8: The trust ends when all the assets are distributed to the beneficiaries.

And now you understand the ILIT and are ready to amaze your friends with your knowledge!!

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