For people in Maryland thinking about planning for the future, an irrevocable life insurance trust (ILIT) may hold certain advantages. An ILIT can allow people to meet various goals, from reducing exposure to estate taxes to distributing insurance proceeds to a range of beneficiaries. Since the Tax Cuts and Jobs Act significantly raised the individual and marital exemptions to estate taxes, many people have wondered whether it is still worthwhile to create an ILIT.
There are still a number of reasons why an ILIT may be a useful part of your estate plan. As stated in the name, an ILIT is irrevocable, which means that the terms of the trust cannot be changed after it is created. You cannot later decide to make changes to the trust after it is completed. This is one major reason that an ILIT can be exempted from taxes; as an irrevocable trust, the property of the ILIT is no longer substantially under your control. An ILIT can prevent your life insurance benefits from being included as part of your estate for tax purposes while directing how the proceeds of the policy will be directed.
Estate tax exemptions will sunset
Even though the individual estate tax limit was raised to $11.4 million per person, it is scheduled to revert to $5 million in 2026, unless Congress votes to extend the raised limits. This means that people with large estates may still see tax benefits from including an ILIT as part of their estate plans.
As an irrevocable trust, an ILIT offers further forms of protection from division in a divorce, creditors seeking payment and judgments from lawsuits. It also keeps the proceeds of your insurance policy out of the probate process. Like other trusts, you can create a plan for how the proceeds shall be used to equalize inheritances, fund the needs of a person with disabilities or support a business succession plan. An ILIT can still be a viable option as part of an overall plan.