San Francisco Bay Area Trust Attorney Asks, “Is a Life Insurance Trust Right for You?”

When it comes to asset protection planning for retirement and leaving legacies to your loved ones, there are several different trusts available that can help accomplish your goals. One type of trust I recommend as a Bay Area trust attorney, called an Irrevocable Life Insurance Trust (ILIT), ensures that the benefits of your life insurance policy are kept separate from your taxable estate.

Experienced estate and elder law attorneys in the Bay Area will often recommend ILITs to clients who own large life insurance policies in addition to assets that may put them over state or federal estate tax thresholds. Additionally, ILITs permit policy owners to choose who benefits from the life insurance proceeds and how the benefit payments are made.

But how do you know if an ILIT is right for you? The first step is to talk to a San Francisco Bay Area trust attorney who can determine if this type of trust fits in with your goals, but here is a primer to get you ready for that discussion:

Since an ILIT is an irrevocable trust, it cannot be changed or revoked by the Grantor (the person who makes the trust) and the Grantor must give up all claims of ownership to the assets held in the trust. Once a life insurance policy is transferred to the ILIT, the Grantor is no longer the owner of the policy and technically has no control over the policy or any beneficiary designations.

However, the Grantor is the person who sets the terms of the trust, so they actually can control how and to whom the life insurance distributions are made, as well as at what point those distributions are made. The Grantor names a Trustee, usually a spouse or adult child but sometimes an objective third-party, to oversee the trust and the life insurance policy. One thing to note is that the life insurance policy ownership must be transferred to the ILIT at least three years before the death of the Grantor, otherwise, the trust will not keep it out of the Grantor’s taxable estate.

An Irrevocable Life Insurance Trust takes a lot of skill and expertise to craft correctly. Fine attention to detail and knowledge of the estate tax system is necessary when the trust is drafted, which is why an experienced estate or elder law attorney in Santa Clara should be the only one to put together this type of trust. If it’s done incorrectly, your estate will be responsible for paying estate taxes on your life insurance policies while your wishes for your beneficiaries may not be fulfilled.

If you think an Irrevocable Life Insurance Trust is a good fit for your situation, or if you’d like an experienced San Francisco Bay Area trust attorney to review your existing irrevocable life insurance trust, please contact our Santa Clara estate and elder law office at (650) 422-3313 to schedule a complimentary initial consultation.