An Irrevocable Life Insurance Trust (ILIT) can be a powerful component of an estate plan for Big River residents who want to manage life insurance outside of their taxable estate while providing clear instructions for distribution after death. At the Law Offices of Robert P. Bergman, we help clients understand how an ILIT operates, how it interacts with other estate planning documents like pour-over wills and revocable living trusts, and how to select trustees and beneficiaries. This guide is designed to explain basic concepts, outline common benefits, and describe the practical steps involved in creating and funding an ILIT in San Bernardino County and elsewhere in California.
Choosing to create an ILIT involves practical decisions about ownership, funding, trustee duties, and coordination with beneficiary designations on retirement accounts and life insurance policies. An ILIT removes the insured’s policy from the estate for estate tax purposes when properly structured and funded, and it can protect proceeds from probate and certain creditor claims. This document covers how ILITs work with financial powers of attorney, certification of trust, and related estate planning instruments offered by our office. The goal is to give Big River families a clear roadmap to make informed decisions and take the next steps toward implementation.
An ILIT can provide significant advantages for families concerned about estate taxes, probate delays, and preserving insurance proceeds for intended recipients. By placing a life insurance policy in an irrevocable trust, the proceeds can bypass the probate process and be distributed according to the trust’s terms, which helps maintain privacy and speed distributions. The trust structure also supports managing proceeds for minors, individuals with special needs, or beneficiaries who may not be ready to receive large sums outright. In many cases, an ILIT helps preserve family assets and provides a predictable method to fund estate liquidity needs and legacy planning objectives.
The Law Offices of Robert P. Bergman serves clients across California from our San Jose location and maintains a strong focus on practical, client-centered estate planning for residents of Big River and San Bernardino County. We bring longstanding experience preparing comprehensive estate plans including revocable living trusts, wills, powers of attorney, and complex instruments like ILITs and irrevocable trusts for specific purposes. Our approach emphasizes clear communication, careful document drafting, and coordinated implementation so that each client’s wishes are honored and estate administration is simplified for heirs.
An Irrevocable Life Insurance Trust is a trust entity that owns life insurance policies on the life of the grantor or another insured and is irrevocable once established. The trust designation removes policy proceeds from the insured’s estate for federal estate tax purposes when the trust is properly created and the policy is owned by the trust rather than by the insured. The trustee manages the policy and handles premium payments and distributions. Families should understand funding requirements, potential gift tax issues related to policy transfers, and how trustee powers and beneficiary designations should be aligned to achieve the intended estate planning goals.
Establishing an ILIT requires attention to timing and formalities to ensure the intended tax and probate outcomes. If a policy is newly purchased in the trust name, premiums can be paid with gifts from the grantor under annual gift tax exclusions using Crummey withdrawal notices when appropriate. If an existing policy is transferred into an ILIT, a three-year lookback rule may apply for estate inclusion unless steps are taken in advance. Trustees have administrative responsibilities including recordkeeping, premium payments, and coordination with life insurance carriers, and these duties should be clearly described in trust documents.
An ILIT is a legally binding trust that irrevocably holds ownership of one or more life insurance policies. The trust is the owner and beneficiary of the policy, which means policy proceeds are paid to the trust at death and then distributed in accordance with trust terms. Because the policy is not owned by the insured, the proceeds are typically excluded from the insured’s taxable estate if the trust was properly structured and any policy transfers occurred outside the applicable lookback period. ILITs can address complex family dynamics, provide liquidity for estate obligations, and protect proceeds from probate and direct creditor claims against the estate.
Key elements of an ILIT include the trust document itself, selection of a trustee, naming of beneficiaries, policy ownership and beneficiary designations, funding arrangements to pay premiums, and procedures for distributions after death. Administrative processes include executing the trust, transferring or applying for the insurance policy in the trust’s name, providing required notices when gifts are made to fund premiums, and maintaining careful records of premium payments and trust activity. Trust language will also specify trustee powers over investments, claims handling, and instructions for distributing insurance proceeds to beneficiaries according to timing or conditions set by the grantor.
Understanding certain technical terms helps clients make informed decisions. Important concepts include ownership versus beneficiary designations, the three-year estate inclusion rule for transferred policies, Crummey withdrawal powers used for gift-splitting and annual exclusion gifts, trustee duties, and coordination with other estate planning documents. Familiarity with these terms clarifies how an ILIT fits into an overall estate plan and what administrative steps are required. Our team explains terminology in plain language and illustrates how each term affects funding, tax treatment, and the trust’s administration after death in a way that is practical and straightforward.
Ownership refers to who legally owns the life insurance policy and has the rights to change or surrender it, while beneficiary designation specifies who will receive the policy proceeds at the insured’s death. In an ILIT, the trust is typically the owner and beneficiary, shifting both control and proceeds into a trust vehicle where the trustee follows written instructions. Distinguishing ownership from beneficiary designation is important because ownership determines estate inclusion and control, whereas beneficiary designation determines eventual recipients. Accurate documentation and coordination with the insurer are necessary to confirm that ownership and beneficiary assignments align with the trust document.
Crummey withdrawal rights allow beneficiaries a temporary right to withdraw gifts made to the trust so that those gifts qualify for the annual gift tax exclusion. Trustees provide notice to beneficiaries of the gift and the limited withdrawal window, after which funds are used to pay insurance premiums for the trust’s policies. Properly used, Crummey powers enable routine premium funding without triggering gift tax consequences while preserving the grantor’s intended trust protections. Clear procedures for notices and documented waiver decisions are important to validate the application of annual exclusions for premium payments.
The three-year rule refers to a tax provision where life insurance policies transferred to a trust within three years of the insured’s death may remain includible in the insured’s gross estate for federal estate tax purposes. This rule aims to prevent last-minute transfers intended to avoid estate taxation. To avoid unintended inclusion, clients typically plan transfers well in advance or purchase policies directly in the ILIT. Proper timing and coordinated planning with other estate documents reduce the risk that life insurance proceeds will be subject to estate taxation under this provision.
Trustees are responsible for managing trust assets, paying premiums, communicating with the insurer, maintaining records, and distributing proceeds according to the trust terms after the insured’s death. Trust documents should outline who has authority to make decisions, how distributions are to be made, and any conditions for payout such as staggered distributions or educational uses. Selecting a trustee who can carry out these administrative duties reliably is essential for smooth trust operation. Clear guidance in the trust documents reduces ambiguity and supports efficient administration when the trust becomes active.
When evaluating estate planning strategies, ILITs should be compared with owning a policy outright, using a revocable living trust, and beneficiary designations on individual accounts. Owning a policy personally offers direct control but may expose proceeds to estate inclusion and probate. A revocable living trust provides flexibility during life but does not remove assets from the estate while the grantor retains powers. Beneficiary designations are simple but may lack the creditor protection and distribution controls an ILIT provides. Assessing family objectives, potential tax exposure, and the need for controlled distributions helps determine which approach, or combination of instruments, is most appropriate.
A limited approach may suffice for households with modest assets and limited concern about federal estate taxes. If a family’s primary goal is to provide a straightforward death benefit without complex distribution instructions or long-term asset protection, naming beneficiaries directly on the policy and keeping a simple will or revocable trust for other assets may be adequate. This approach minimizes administrative complexity and ongoing trust management responsibilities while still ensuring beneficiaries receive the insurance proceeds. It is appropriate when there is confidence that proceeds will not create significant estate tax exposure or when immediate liquidity is the only priority.
If beneficiaries have stable financial situations and creditor exposure is not a concern, a limited approach to life insurance ownership and beneficiary designation may be practical. Families who do not need to impose distribution conditions or provide managed payouts for minors or vulnerable beneficiaries often find that direct beneficiary designations accomplish their goals efficiently. In such cases, the administrative overhead of an ILIT and the need for ongoing funding mechanisms may be unnecessary. Deciding on this limited approach should still involve review of existing estate documents so that beneficiary designations align with the overall estate plan.
A comprehensive ILIT strategy is often advisable for individuals with larger estates, significant life insurance proceeds, or concerns about estate taxes and liquidity needs. Families who anticipate substantial estate tax exposure require coordinated planning to reduce tax burdens and ensure funds are available to pay taxes, debts, and other obligations. An ILIT structured in conjunction with other trusts and estate planning documents helps create liquidity for estate settlement and can preserve wealth intended for heirs. Such coordinated planning helps align life insurance ownership with broader legacy and financial planning goals across jurisdictions such as California.
When protecting proceeds from potential creditor claims against beneficiaries or when managing distributions to younger or vulnerable heirs is a priority, a comprehensive ILIT provides a useful framework. The trust’s terms allow the grantor to outline specific conditions for payouts or to direct funds for education, medical needs, or long-term support. With careful drafting, the ILIT can provide spendthrift protections and distribution schedules that preserve assets for intended purposes while reducing the risk that proceeds will be quickly dissipated or subject to creditors of individual beneficiaries.
A comprehensive approach to ILIT planning integrates insurance ownership with a broader estate plan to achieve tax efficiency, probate avoidance, and structured distributions. When life insurance is coordinated with a revocable living trust, wills, powers of attorney, and other trust vehicles, it ensures that proceeds support estate liquidity, creditor protection, and long-term beneficiary needs. The benefits also include greater clarity for trustees, fewer disputes among heirs, and smoother administration at the time of death. This approach is particularly valuable for families looking to preserve intergenerational wealth and fund specific legacy objectives.
Comprehensive planning also reduces the likelihood of unintended outcomes from inconsistent beneficiary designations, policy ownership, or retirement account designations. Integrating an ILIT with other documents like a pour-over will, certification of trust, and financial power of attorney helps ensure that assets are coordinated and that trustees have authority to act promptly. This alignment helps avoid delays and confusion, and sets up clear procedures for premium funding, claims filing, and distributions. Overall, a unified plan supports efficient administration and respects the grantor’s intentions with minimal friction for surviving family members.
Properly structured ILITs can remove life insurance proceeds from an estate, which may reduce estate tax exposure while providing immediate liquidity to cover taxes, debts, and administrative costs. This can prevent the forced sale of assets or real estate to pay estate obligations. The liquidity provided by an ILIT supports orderly estate settlement and preserves property for intended beneficiaries. When combined with other planning tools, an ILIT helps ensure that insurance proceeds are used for the purposes the grantor intended rather than being consumed by administrative expenses or tax liabilities during estate settlement.
An ILIT allows the grantor to control the timing and conditions of distributions, protecting proceeds from premature dissipation or third-party claims. Trust provisions can direct funds to pay for education, healthcare, or retirement needs, and can establish staggered distributions over time to support long-term financial stability for beneficiaries. These controls are especially helpful when beneficiaries include minors or individuals with disabilities, and when there is a desire to balance immediate needs with long-term preservation of capital. Thoughtful drafting ensures trustees have clear guidance on when and how to use trust assets.
Begin ILIT planning well before anticipated deadlines to avoid potential estate inclusion under the three-year transfer rule and to allow comfortable funding arrangements. Early planning enables clients to purchase policies in the trust name or to make transfers with time for the lookback period to pass, and it provides flexibility to design funding strategies that use annual gift exclusions. Starting early also permits careful selection of trustees and beneficiaries, thoughtful drafting of distribution terms, and coordination with other estate planning documents so that the ILIT functions as intended when it becomes operative.
Establish clear procedures for funding premium payments to avoid lapses and to maintain the trust’s intended tax and probate outcomes. Document whether premiums will be funded by the grantor, by gifts from others, or by trustee-managed assets, and ensure Crummey notices and gift documentation are provided when necessary. Keep detailed records of premium payments, notices to beneficiaries, and any waivers of withdrawal rights. These records support the trust’s administration and help validate the application of gift exclusion rules during audits or later reviews.
Consider an ILIT if you want to remove life insurance proceeds from your taxable estate, provide structured distributions to beneficiaries, or ensure that insurance proceeds avoid probate. An ILIT can be particularly valuable when beneficiaries include minors, individuals with limited financial experience, or family members who may face creditor claims. The trust structure supports customized distribution schedules, protections for vulnerable beneficiaries, and methods to guarantee liquidity for estate obligations. For many families, an ILIT complements other estate planning tools and creates a predictable mechanism for transferring life insurance benefits according to specific wishes.
An ILIT may also be appropriate if you want to consolidate control of life insurance policies and create a formal administration process to handle claims, premium payments, and distributions. It provides a single legal vehicle that trustees can manage with written authority, reducing confusion and potential disputes among heirs. When combined with documents such as a certification of trust, pour-over will, and powers of attorney, an ILIT helps ensure a coordinated plan that addresses both immediate needs and long-term legacy objectives for families in Big River and throughout California.
Typical circumstances prompting the use of an ILIT include concerns about estate taxes, the need to provide liquidity for settling an estate, the desire to control disbursements to beneficiaries, and plans to protect proceeds from creditor claims. An ILIT is often recommended when beneficiaries would benefit from structured payouts rather than lump-sum distributions, when trusts are being used to preserve wealth across generations, or when a family wants to coordinate life insurance with other trust-based strategies like special needs trusts or retirement plan trusts. Each situation requires tailored drafting to meet the client’s objectives and family considerations.
If you have a high net worth or anticipate estate tax exposure, an ILIT can be an effective tool for removing life insurance proceeds from your taxable estate when correctly structured. This approach can preserve value for heirs, allow for orderly payment of estate taxes, and protect family assets that may otherwise need to be liquidated. Coordination with other trusts and planning techniques may be necessary to achieve the full tax and distribution benefits, and early action is often advisable to allow for timing rules and to ensure that intended outcomes are achieved.
When beneficiaries are minors, young adults, or individuals who may need long-term financial support, an ILIT allows you to set conditions for distributions, establish educational or healthcare allocations, and appoint a trustee to manage funds responsibly. This structure helps prevent funds from being squandered or accessed by creditors, and it can be tailored to deliver funds in stages or under specified circumstances. Clear trust language about distribution standards and trustee responsibilities reduces ambiguity and supports the grantor’s intent to provide sustained support for vulnerable family members.
An ILIT can help protect life insurance proceeds from certain creditor claims against beneficiaries by keeping distributions within the trust framework and using spendthrift provisions where appropriate. While the level of creditor protection depends on state law and the timing of transfers, trust-based ownership offers a legal separation between the insured’s estate and the proceeds held for beneficiaries. This protection can be particularly useful when beneficiaries are in professions or financial situations that expose them to potential claims, enabling a measured distribution approach to preserve assets for their intended purposes.
The Law Offices of Robert P. Bergman provides estate planning services to residents of Big River, San Bernardino County, and across California. We focus on clear, practical documents including ILITs, revocable living trusts, pour-over wills, advanced healthcare directives, financial powers of attorney, and specialized arrangements such as special needs trusts and retirement plan trusts. Our team assists clients in selecting the right combination of instruments, coordinating beneficiary designations, and implementing funding strategies so that each plan aligns with personal, family, and financial goals while simplifying future administration for loved ones.
Clients choose the Law Offices of Robert P. Bergman for a personalized approach to estate planning that emphasizes clarity, thorough documentation, and careful coordination among legal instruments. We take time to understand family dynamics, financial arrangements, and long-term objectives before drafting an ILIT or related documents. Our process includes reviewing existing policies, advising on funding methods, and preparing clear trustee instructions so that the trust functions as intended and integrates seamlessly with existing wills, trusts, and beneficiary designations.
We prioritize practical solutions that reduce administrative burdens for families and provide straightforward guidance on trustee responsibilities, premium funding, and distribution structures. Our team works with clients to explain potential tax and timing considerations, and to prepare notices and documentation needed to support premium gifts and trust administration. This comprehensive attention helps ensure that the ILIT yields the intended probate and tax benefits while offering predictable outcomes for beneficiaries.
Throughout the planning and implementation process, we emphasize ongoing review and updates to keep the ILIT aligned with life changes such as births, deaths, marriages, or changes in financial circumstances. Periodic reviews ensure beneficiary designations remain current, funding mechanisms continue to work effectively, and trust terms still reflect the grantor’s wishes. This proactive maintenance helps prevent unintended consequences and keeps each estate plan functioning as a practical roadmap for the future.
Our process for creating an ILIT begins with an initial consultation to gather information about assets, life insurance policies, family needs, and estate planning goals. We review existing documents and discuss funding strategies and trustee selection before drafting the trust instrument. After execution, we assist with transferring or acquiring policies in the trust’s name, preparing any necessary notices for premium funding, and coordinating beneficiary designations and related documents. We also provide guidance on recordkeeping and trustee duties so the trust can be administered effectively when it becomes operative.
The first step involves detailed planning and document drafting tailored to each client’s circumstances. We identify the appropriate trust provisions, choose trustee powers and distribution terms, and craft language that reflects timing and conditions for distributions. This stage also includes tax considerations, assessment of potential lookback issues for transferred policies, and discussion of funding methods. Clear drafting at this stage reduces ambiguity and sets up the trust to operate smoothly when premium funding begins and the insurance policy is owned by the trust.
We review current insurance policies, beneficiary designations, and related documents to determine if a transfer into an ILIT or a new policy purchased in the trust is the best option. This analysis considers the three-year rule, potential gift tax consequences, and the client’s overall estate planning objectives. By understanding the full financial picture, we can recommend a funding approach that minimizes unintended tax exposure and ensures that the trust’s ownership and beneficiary structure will produce the intended probate and distribution outcomes.
Trust drafting establishes the trustee’s powers, distribution standards, and administrative procedures for premium payments and claims. We draft clear provisions that outline how premiums are to be funded, whether beneficiaries receive notice of contributions, and any special distribution conditions such as support for education or healthcare. This stage ensures trustees have explicit authority to act on behalf of the trust and that their responsibilities are documented, which reduces the likelihood of disputes and facilitates efficient trust administration after the insured’s death.
After the trust is executed, the next phase focuses on funding and ensuring the life insurance policy is properly owned by the trust. If an existing policy is transferred, documentation and timing must be carefully managed to avoid estate inclusion under the three-year rule unless that outcome is acceptable or unavoidable. If a policy is purchased in the trust name, we coordinate the application and premium payment methods. We also prepare any necessary Crummey notices or other documentation to support annual exclusion treatment for premium gifts.
We work directly with insurance carriers and financial institutions to confirm ownership transfers, update beneficiary designations, and ensure that policy records reflect the trust as owner and beneficiary. This coordination helps prevent administrative oversights that could compromise the trust’s intended results. We also advise on payment mechanisms for premiums and document any gift transactions or notices required to support tax treatment. Proper coordination reduces the risk of delays or conflicting paperwork during the trust’s funding process.
When premiums are funded by gifts to the ILIT, it is important to document each contribution and provide notices to beneficiaries when Crummey powers are used. Accurate records of gift transactions and beneficiary notices support the application of annual gift tax exclusions and provide evidence in the event of future review. Trustees should maintain organized files of all premium payments, notices, waivers, and related correspondence so that the trust’s funding history is clear and defensible for tax and administrative purposes.
Once the insured passes away, the trustee files a claim with the insurer, collects policy proceeds, and administers distributions according to the trust terms. The trustee must follow procedures for documentation, possible estate tax filings, and communication with beneficiaries. If the trust is intended to provide structured payouts, the trustee manages distributions in line with the trust’s conditions. The administration phase also includes maintaining records of all payments and distributions, preparing required tax forms, and ensuring that the trust’s assets are handled in a manner consistent with the grantor’s wishes.
The trustee initiates the claims process with the insurer, provides required certificates and documentation, and ensures proceeds are deposited into the trust account for distribution. Trustees should be prepared to supply death certificates, trust documents, and identification to the insurer. Prompt and accurate claims filing helps expedite receipt of funds needed for estate obligations or beneficiary support. Trustees also coordinate with estate accountants or counsel to determine whether any tax filings are required and to document the trust’s receipt of the proceeds.
After proceeds are received, the trustee follows the trust’s instructions for distribution, which may include immediate payments, installment schedules, or discretionary distributions for specific purposes. Trustees should keep thorough records of all actions, communications, and disbursements to provide beneficiaries with transparent accounting. Final accounting and closure steps include reconciling the trust’s receipts and payments, filing any required tax returns, and ensuring that remaining trust assets are distributed in accordance with the trust terms, after which the trustee can conclude administration responsibilities.
An Irrevocable Life Insurance Trust (ILIT) is a legal trust that owns and is the beneficiary of life insurance policies, designed to keep policy proceeds outside the insured’s taxable estate when properly structured. The trust holds the policy, the trustee manages premium payments and submits claims after death, and proceeds are distributed according to the trust terms, which can provide privacy and controlled distributions to heirs. ILITs are used to create liquidity for estate obligations, protect proceeds from probate, and set conditions for beneficiary distributions. Deciding whether an ILIT is appropriate depends on your asset size, family needs, and legacy goals. For families concerned about estate taxes or wanting to protect proceeds from probate and immediate creditor claims, an ILIT can be beneficial. The process includes drafting the trust, transferring or purchasing a policy in the trust name, and establishing funding procedures. Early planning and coordination with other estate documents support effective implementation and predictable outcomes.
Transferring an existing policy into an ILIT can be effective but requires attention to tax timing rules. If a policy is transferred within three years of the insured’s death, the proceeds may be includible in the insured’s estate under the lookback rule, potentially negating certain estate tax benefits. To avoid this outcome, transfers should be undertaken well before any anticipated need, or a new policy may be purchased directly in the trust name to achieve clearer estate exclusion. There are also potential gift tax considerations when transferring a policy, and funding premium payments may involve annual exclusion gifts using Crummey notices. Proper documentation of transfers, funding, and notices helps preserve intended tax treatment and provides a clear audit trail if questions arise.
A trustee should be someone trustworthy, organized, and capable of handling administrative duties such as paying premiums, communicating with beneficiaries, and filing claims with insurers. Many clients choose a family member, a trusted advisor, or a corporate trustee depending on the complexity of the trust and the expected administrative load. The trust document should clearly describe the trustee’s powers and any procedures for delegation or hiring professionals to assist with investment and claims matters. Trustees must maintain accurate records of payments and notices, ensure compliance with the trust’s terms, and make distributions as directed. Because trustee decisions can affect beneficiary outcomes and potential tax matters, clear guidance in the trust instrument helps trustees carry out duties consistently and minimizes the risk of disputes among heirs.
Premiums for policies owned by an ILIT can be funded through gifts from the grantor, contributions from other family members, or trust assets if available. To take advantage of the annual gift tax exclusion when adult beneficiaries have Crummey withdrawal rights, trustees provide timely notices informing beneficiaries of their limited ability to withdraw the gifted funds for a short window. These notices and documented waivers help attach the gift tax exclusion to premium payments and prevent unexpected gift tax liabilities. Accurate recordkeeping of gift amounts, notices provided, and any beneficiary responses is important to support the intended tax treatment. We assist clients in creating a repeatable funding process that includes drafting notice language and maintaining documentation so that premium funding is consistent and defensible.
An ILIT can offer a measure of protection for policy proceeds from beneficiaries’ creditors by holding proceeds within the trust and distributing them under controlled terms. Spendthrift provisions and trust-directed distributions can limit a beneficiary’s direct access to funds, which may reduce exposure to certain creditor claims. However, the degree of protection depends on state law and the trust’s timing relative to potential debts or claims, so planning should be tailored to individual circumstances. While an ILIT can help shield proceeds in many scenarios, it is not an absolute guarantee against all creditor claims. Careful drafting, proper timing of transfers, and alignment with other protective strategies help maximize the intended protections while complying with California law and applicable creditor exceptions.
Because an ILIT is irrevocable, changing its terms after creation is generally limited. Some flexibility may be achieved if the trust document includes certain trustee powers or provisions for decanting or modification under state trust modification statutes. Additionally, the grantor can adjust related estate planning documents and funding strategies to respond to changed circumstances, though altering the core ILIT terms is more constrained than with revocable instruments. Regular reviews of the overall estate plan help identify whether updates outside the ILIT, such as changes to pour-over wills, powers of attorney, or beneficiary designations, are needed to maintain alignment. We guide clients on options for updating plans where possible and recommend timing and documentation to address changing family or financial situations.
Yes, an ILIT can be coordinated with other trusts like a special needs trust or a pour-over will to ensure comprehensive planning. For example, an ILIT can provide liquidity that funds other trust arrangements, or distributions can be directed to specialized trusts established for beneficiaries with disabilities. Coordination ensures that funds are available to support ongoing needs without disqualifying beneficiaries from public benefits when careful drafting is used to protect eligibility. A pour-over will can be used to transfer assets into a revocable trust on death, while the ILIT remains focused on life insurance proceeds. Combining these tools creates a cohesive plan that addresses probate avoidance, asset protection, and managing distributions for different beneficiary needs across a full estate plan.
Most types of life insurance policies can be placed into an ILIT, including term and permanent policies, provided the insurer allows the trust to be the owner. The decision often depends on policy terms, surrender values, and premium funding methods. For new policies, it is common to apply directly in the trust name; for existing policies, transfers should be evaluated carefully for tax and timing consequences, including the three-year rule that may cause estate inclusion if the insured dies shortly after transfer. Insurer requirements and policy details vary, so coordination with the carrier and a careful review of policy contracts are important steps. We assist clients in assessing whether to transfer an existing policy or acquire a new policy in the trust to meet planning goals efficiently.
The three-year rule provides that if a policy is transferred into an ILIT within three years before the insured’s death, the policy proceeds may still be included in the insured’s gross estate for federal estate tax purposes. This rule is intended to prevent last-minute transfers designed to avoid estate taxes. To avoid this result, many clients transfer policies well in advance or purchase policies directly in the ILIT so the ownership is established from inception. Understanding the timing implications is essential for planning. If a transfer occurs late in life, clients and advisors should evaluate whether the potential estate inclusion would negate the benefits of the transfer and consider alternative strategies accordingly.
To begin creating an ILIT, contact the Law Offices of Robert P. Bergman to schedule an initial consultation where we review your assets, insurance policies, family goals, and any existing estate documents. We will explain options for owning policies in a trust, evaluate potential tax and timing issues, and recommend funding strategies that align with your objectives. This initial planning conversation lays the groundwork for drafting a trust tailored to your needs and for coordinating transfers or purchases of policies as appropriate. After the initial consultation, we prepare the trust documents, assist with execution and funding steps, and help coordinate with insurers and financial institutions to confirm proper ownership. We also provide guidance on trustee selection and ongoing recordkeeping practices so that the ILIT operates effectively and supports the intended estate plan.
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