An Irrevocable Life Insurance Trust (ILIT) can be an effective estate planning tool for preserving life insurance proceeds while minimizing potential estate tax exposure and protecting assets for beneficiaries. At the Law Offices of Robert P. Bergman, we assist San Diego County residents who want clear, practical guidance about creating and funding an ILIT tailored to their family situation. This introduction explains foundational concepts, common uses, and the general benefits people seek when they choose this approach. We focus on straightforward explanations so clients can make informed decisions about whether an ILIT fits within their broader estate plan.
This page walks through the steps of setting up an ILIT, how it interacts with other estate planning documents, and what to expect during administration. You will learn how naming the trust as the owner and beneficiary of life insurance works, why proper funding and trustee selection matter, and how an ILIT can work with revocable living trusts, pour-over wills, powers of attorney, and health care directives. We also describe considerations unique to California and to families with beneficiaries who may have special needs or creditor exposure, helping you weigh options for preserving wealth and protecting loved ones.
An ILIT provides several potential benefits for individuals seeking to protect life insurance proceeds from estate taxes and creditor claims while ensuring orderly distribution to beneficiaries. By transferring a policy into an irrevocable trust, the death benefit is generally kept outside the insured’s taxable estate, which can preserve more value for heirs. An ILIT can also impose terms that control beneficiary access, protect funds for minors, and coordinate with other planning documents. For families with blended households, business interests, or future care needs, this trust structure can offer peace of mind and structured control over how insurance assets are used after the insured’s death.
The Law Offices of Robert P. Bergman provides estate planning services to individuals and families throughout San Jose, Fairbanks Ranch, and the surrounding communities. Our approach centers on listening to client goals, explaining legal options in clear language, and drafting documents that reflect each client’s wishes. We have handled matters involving revocable and irrevocable trusts, wills, powers of attorney, and trust administration, and we work closely with clients to integrate insurance planning into a complete estate plan. Clients benefit from practical strategies intended to preserve family wealth and provide for beneficiaries in a way that matches their priorities.
An Irrevocable Life Insurance Trust is a trust created to own and receive the benefits of a life insurance policy while removing the policy proceeds from the insured’s taxable estate. The trust is drafted so the grantor gives up ownership and certain rights over the policy, which is why the trust is termed ‘irrevocable.’ Properly structured, the trust holds the policy, collects the death benefit, and distributes proceeds according to the grantor’s specified terms. Selection of a trustee, timing of funding, and coordination with the insured’s overall estate plan are important to achieving the desired tax and asset protection outcomes.
Setting up an ILIT involves several practical steps: drafting trust terms, transferring an existing policy or purchasing a new policy owned by the trust, notifying relevant parties, and making gift or Crummey contributions if premiums will be paid by the grantor. Trustees must manage the policy, handle premium payments if required, and execute distributions after the insured’s death. Because the grantor must relinquish control over the policy, clients should understand how that affects access to cash value and what alternatives may exist if liquidity is needed during the grantor’s lifetime.
An ILIT is a legal entity that owns a life insurance policy and holds the death benefit for the benefit of named beneficiaries. The grantor transfers ownership of an existing policy or directs the trust to purchase a new policy, and the trust terms govern who receives proceeds and when. Because the trust owner, not the insured, holds policy ownership, the death benefit is generally excluded from the insured’s probate estate. The trust document may include instructions about asset distribution, survivor income replacement, funding of trusts for minors or beneficiaries with special needs, and conditions to protect assets from potential creditors or spendthrift risks.
Core elements of an ILIT include the trust agreement, trustee appointment, beneficiary designations, and funding mechanism. The setup process begins with documenting goals and choosing the trustee, then drafting the trust terms and transferring the insurance policy into trust ownership. If the grantor will pay premiums, the trust often uses gift contributions that qualify for annual exclusion treatment when structured correctly. Ongoing trustee duties include making premium payments, maintaining records, and carrying out distribution instructions upon the insured’s death. Proper coordination with other estate documents like pour-over wills and powers of attorney ensures the ILIT operates as intended.
This section defines important terms you may encounter when considering an ILIT. Understanding these phrases helps you communicate preferences and evaluate options. Common entries include grantor, trustee, beneficiary, gift tax annual exclusion, Crummey notice, irrevocable transfer, policy assignment, and pour-over provisions. Clear definitions make it easier to weigh tradeoffs such as transferring control in exchange for potential tax advantages and beneficiary protections. If you are unfamiliar with some concepts, reviewing this glossary before meeting with counsel will make planning conversations more productive and help you focus on choices that meet family and financial goals.
The grantor is the person who establishes the trust and transfers assets into it. In the context of an ILIT, the grantor typically creates the trust terms and moves ownership of a life insurance policy into trust control. Once assets are transferred to an irrevocable trust, the grantor generally gives up direct ownership and certain powers over those assets, which is a key feature that allows the trust to operate outside the grantor’s taxable estate. Selecting a grantor involves understanding the tradeoffs between lifetime control and the long term benefits the trust may provide for beneficiaries.
The trustee is the individual or entity responsible for managing trust assets in accordance with the trust document. In an ILIT, trustee duties typically include holding ownership of the insurance policy, ensuring premiums are paid, maintaining records, issuing any required notices to beneficiaries, and distributing proceeds when directed. Trustees must act in the interest of beneficiaries and follow the trust terms, which can include how and when funds are distributed for education, support, or other needs. Choosing a trusted and capable trustee helps ensure the trust functions smoothly over time.
A Crummey right allows beneficiaries to withdraw certain contributions to the trust for a limited period, which is often used to qualify gifts for the annual gift tax exclusion. When contributions are used to pay policy premiums, timely notices and withdrawal windows help those contributions receive favorable gift tax treatment. Although beneficiaries rarely exercise the withdrawal right, the mechanism is valuable for maintaining tax efficiency while funding the ILIT. Proper documentation and administration are important to ensure that IRS requirements for annual exclusion gifts are satisfied.
A pour-over will is a will that directs any assets left outside of a trust at death to be transferred into the individual’s primary revocable trust. While a pour-over will does not avoid probate for assets it transfers, it helps ensure that remaining assets are captured by trust terms and distributed as intended. In an estate plan that includes an ILIT, other documents such as pour-over wills, powers of attorney, and health care directives coordinate to provide comprehensive coverage for lifetime and posthumous affairs, making sure that assets and decisions are handled consistently with the client’s wishes.
When evaluating an ILIT, it helps to compare it to other estate planning techniques such as retaining a policy in a revocable living trust or keeping ownership personally. Keeping a life insurance policy outside an ILIT preserves liquidity and control but may expose the policy proceeds to estate tax if the estate is large. A revocable trust provides flexibility during life but does not remove the asset from the taxable estate. An ILIT requires giving up certain ownership rights, yet it can preserve more of the death benefit for beneficiaries under the right circumstances. Each path involves tradeoffs in control, tax implications, and protection from creditors.
For individuals with modest estates and limited exposure to federal estate tax or creditor claims, retaining a life insurance policy in personal ownership or a revocable trust may be sufficient. Simpler arrangements reduce administrative complexity and maintain access to policy cash value during the policyholder’s lifetime. If beneficiaries are financially responsible and there are no anticipated creditor claims or special needs concerns, a streamlined plan can meet family goals while avoiding the added paperwork and permanent relinquishment of control that an ILIT requires. It is important to review options periodically as circumstances change.
A limited approach can be appropriate for short-term coverage needs where long-term tax planning is less relevant, such as temporary income replacement during working years or short-term loans tied to business obligations. When the priority is immediate financial protection rather than long-range estate preservation, maintaining simple ownership makes it easier to adjust coverage later. In these situations, clients may favor policies that offer liquidity and flexibility, with decisions reassessed as life events alter the estate planning picture or the size of the estate grows to raise different considerations.
For individuals with significant estates, business interests, or complex family dynamics, a comprehensive strategy that includes an ILIT may make sense to preserve wealth and reduce potential estate taxes. This approach coordinates life insurance ownership with trusts, retirement plan considerations, and other assets to achieve a cohesive plan. Planning in a comprehensive way often involves analyzing projected estate tax exposure, timing transfers, and ensuring policies and trust documents are structured to produce the intended outcomes for beneficiaries while respecting legal formalities and state rules.
When beneficiaries include minors, individuals with special needs, or people vulnerable to creditor claims, a trust-centered plan can protect proceeds and govern distributions over time. An ILIT can be set up with distribution standards, education trusts, or supplemental needs provisions that preserve public benefits while providing support. Combining an ILIT with other planning documents like special needs trusts, guardianship nominations, and durable powers of attorney helps create a safety net that addresses both financial security and long-term care considerations for those who may need managed distributions.
A comprehensive approach coordinates insurance planning with estate documents to provide clarity, reduce tax exposure, and protect beneficiary interests. By integrating the ILIT with the rest of the estate plan, clients can ensure that proceeds are used for intended purposes such as paying estate taxes, equalizing inheritances among heirs, or providing ongoing support. This cohesion helps avoid unintended consequences, reduces the likelihood of disputes, and creates an organized structure for trustees to administer assets reliably. Thoughtful planning supports long term family goals and minimizes surprises in administration.
Comprehensive planning also allows for contingency planning and flexibility to address changes in law, family circumstances, or financial needs. While an ILIT is inherently irrevocable, the overall estate plan can include other instruments that are amendable during life, such as revocable trusts or powers of attorney, giving the grantor some ability to adapt. Coordinating beneficiary designations, retirement accounts, and trust provisions reduces competing claims on assets and streamlines administration, which can save time, reduce costs, and preserve value for intended recipients.
One significant benefit of using an ILIT within a broader plan is potential mitigation of estate tax exposure when the policy proceeds are properly removed from the taxable estate. Keeping the death benefit outside the grantor’s estate can preserve more wealth for heirs, especially when combined with other gifting strategies and trust arrangements. Careful drafting and administration are important to ensure compliance with timing rules and ownership transfer requirements so the intended tax outcomes are achieved and the family receives the maximum available benefit.
An ILIT provides a means to control how life insurance proceeds are used, protecting assets from imprudent spending and potential creditor claims. Trust terms can specify the timing and purpose of distributions, such as education, healthcare, or periodic support, and can appoint trustees to manage funds responsibly. This structure is particularly useful for families with beneficiaries who may be young, have special needs, or face creditor risk, because it balances access to financial support with protections that preserve assets for long term benefit and financial stability.
Start by defining the purpose of the ILIT and how the death benefit should be used. Identify whether proceeds are intended for estate tax liquidity, income replacement, education funding, or long term support for beneficiaries. Establish a plan for how premiums will be paid and whether existing policies will be transferred or new policies purchased. Early coordination with retirement accounts, revocable trusts, and beneficiary designations reduces conflicts later. A clear funding plan helps ensure contributions are made on time and that Crummey notices and gift tax considerations are handled properly.
Proper documentation is essential for ILIT effectiveness. Maintain copies of the trust instrument, policy assignments, proof of policy ownership by the trust, and records of premium payments and Crummey notices. Timely notices to beneficiaries about withdrawal rights and proper gift reporting help ensure favorable tax treatment. Regularly review beneficiary designations on other accounts to prevent unintended estate inclusion and update documents when life events occur. Accurate record keeping also facilitates administration after the insured’s death and helps avoid disputes or IRS questions about the trust’s structure and funding.
Clients often consider an ILIT when they want to preserve the full value of life insurance proceeds for beneficiaries, reduce estate tax exposure, or protect death benefits from creditor claims. An ILIT can provide structured distributions to manage beneficiary needs over time and coordinate with other planning documents to fulfill long term goals. People with business interests or complex family dynamics may find the control offered by trust terms particularly helpful. The decision to create an ILIT should be based on a careful review of assets, family objectives, and the tradeoffs involved in transferring policy ownership out of personal control.
Other reasons to consider an ILIT include managing liquidity to pay estate administration costs, providing for beneficiaries who may not be capable of managing a lump sum, and ensuring continuity of financial support for dependent family members. An ILIT can also be part of a broader gifting strategy to gradually transfer wealth and utilize annual gift tax exclusions. Because the trust is irrevocable, it becomes a permanent part of the plan and requires thoughtful drafting to align with your goals, beneficiary needs, and any ongoing obligations such as premium payments.
Typical circumstances that prompt consideration of an ILIT include estates that approach or exceed federal estate tax exemption thresholds, families with blended relationships, business owners who want to preserve liquidity for succession, and individuals concerned about creditor exposure. Additionally, families with minors, beneficiaries with special needs, or those pursuing long term charitable goals may use an ILIT to control distributions and support. Evaluating your situation in light of current tax rules, family dynamics, and insurance ownership can help determine whether an ILIT is an appropriate tool for achieving your planning objectives.
When estates are substantial, clients commonly use trust-based strategies to manage tax exposure and preserve wealth for future generations. An ILIT can be a key part of that plan by ensuring life insurance proceeds are not added to the taxable estate. This helps provide liquidity for estate taxes or other obligations while preserving the full death benefit for heirs. Working through the details early, including timing of transfers and gift tax considerations, helps avoid technical pitfalls and aligns the trust with broader succession or wealth transfer goals.
Families often set up ILITs when beneficiaries may need managed distributions over time rather than immediate lump sums. Trust provisions can be written to provide regular support, fund education expenses, or supply discretionary distributions for health care needs. For beneficiaries who rely on public benefits, combining an ILIT with a supplemental needs trust helps preserve eligibility while providing supplemental support. These tailored provisions give families a measure of financial protection and long term planning that addresses both care and stewardship of the assets.
Business owners may use an ILIT to provide cash for buy-sell agreements, to replace lost income, or to fund estate taxes so that business assets need not be liquidated. By keeping life insurance proceeds outside the taxable estate, the trust can supply liquidity to facilitate an orderly succession. Properly designed ILIT arrangements work alongside business succession plans, corporate buy-sell agreements, and retirement planning to ensure that family-owned businesses remain viable and that heirs receive intended benefits without forced sales or distress transfers.
The Law Offices of Robert P. Bergman serves clients in Fairbanks Ranch, San Diego County, and throughout California with focused estate planning services including ILIT formation, revocable living trusts, wills, powers of attorney, and health care directives. We understand local and state considerations and strive to provide practical legal solutions that protect families and preserve wealth. If you live in Fairbanks Ranch or nearby communities and are considering life insurance trust planning or broader estate strategies, we provide clear guidance, coordinate necessary documents, and help implement a plan suited to your circumstances.
Clients choose the Law Offices of Robert P. Bergman for thoughtful, client-centered estate planning that aims to preserve family assets and ensure orderly distributions to heirs. We emphasize clear communication, careful drafting, and coordination across all estate documents, including wills, revocable trusts, and powers of attorney. Our approach helps clients understand tradeoffs, from relinquishing certain ownership rights to obtaining long term protections for beneficiaries, so they can make confident decisions that align with their family and financial goals.
We provide guidance on practical matters such as funding strategies, trustee selection, and coordination with existing life insurance policies or retirement accounts. Clients benefit from personalized planning that takes into account unique family circumstances, business ownership, and special needs considerations. We also assist with administrative tasks that follow plan implementation, including preparing Crummey notices, maintaining accurate records, and advising trustees on their responsibilities at the time of claim and distribution.
Our firm takes a careful and methodical approach to drafting trust documents to reflect client intentions and minimize ambiguity. We work to ensure plans remain workable over time by including flexible but clear provisions and by recommending regular reviews. With an emphasis on practical solutions and attention to detail, we help clients put structures in place that protect beneficiaries and facilitate smooth administration when the time comes for the trust to be funded and ultimately distributed.
Our process begins with a thorough intake to understand family circumstances, existing assets, and long term goals. We evaluate existing life insurance policies, retirement accounts, and estate documents, then recommend whether an ILIT or alternative arrangement best meets your needs. After outlining options, we draft trust documents, coordinate policy ownership transfers or new policy purchases, and prepare any necessary notices. Post-creation, we provide guidance to trustees and beneficiaries so the trust operates as intended and integrates smoothly with the rest of the estate plan.
The initial planning meeting focuses on discussing your objectives and collecting information about assets, beneficiaries, and any existing estate documents. We identify whether your situation merits an ILIT and explain the implications of transferring policy ownership into a trust. This stage includes a review of life insurance policies, potential premium funding sources, and any business or creditor risks that could affect planning choices. Clear goal setting at the outset helps tailor trust provisions to match the outcomes you want for your family.
We explore how you want proceeds used, which beneficiaries should receive benefits, and whether distributions should be immediate or controlled over time. Understanding family dynamics, minor beneficiaries, special needs concerns, and business interests informs drafting decisions and trustee selection. We also consider whether the ILIT will be part of a larger gifting strategy or used primarily for liquidity. This conversation ensures the trust document will reflect practical instructions for trustees and align with other planning instruments.
We review current life insurance policies to determine ownership, beneficiary designations, and policy terms that affect transferability and funding. Retirement accounts and other assets are examined to ensure beneficiary designations coordinate with trust goals. This review helps identify whether policies should be reassigned to the trust or new policies acquired, and whether premium payments will come from the grantor, trust contributions, or another source. Accurate review prevents unintended tax consequences and preserves policy benefits for intended beneficiaries.
Once objectives are set, we prepare the ILIT document tailored to your instructions, select terms for distributions, and name trustees and beneficiaries. We coordinate the mechanics of transferring existing policies into the trust or establishing new policies owned by the trust, and prepare any notices or gift documentation needed for tax reporting. This phase also includes drafting related documents like pour-over wills or pour-over provisions and aligning beneficiary designations so the estate plan functions cohesively.
Drafting focuses on the distribution standards, trustee powers, and administrative instructions necessary for practical management of the policy and proceeds. Trustee selection is an important decision that affects ongoing administration; we discuss advantages of family trustees, co-trustee models, or corporate trustees and draft provisions to address successor appointment and compensation. Clear, precise trust terms reduce ambiguity and help trustees discharge their duties effectively while following the grantor’s intentions.
Funding may involve assigning existing policies to the ILIT or arranging for the trust to purchase a new policy. If the grantor pays premiums, we prepare the documentation and Crummey notices necessary to qualify contributions for the annual gift tax exclusion when applicable. We also ensure that assignment forms, policy endorsements, and insurer records reflect trust ownership so that claims can be processed smoothly at the time of death. Proper funding and notice procedures protect the intended tax and distribution outcomes.
After the ILIT is in place, trustees must manage premium payments, maintain records, and follow distribution instructions when the insured dies. We provide guidance and templates for notices, record retention, and claims processing to help trustees fulfill obligations. If issues arise, such as contested claims or coordination with probate assets, we assist trustees and beneficiaries in interpreting trust terms and resolving disputes. Ongoing communication and documentation make administration predictable and reduce friction when distributions are made.
Trustees should keep detailed records of all transactions, including premium payments, gift notice receipts, and correspondence with the insurance company. Accurate bookkeeping supports compliance with tax reporting and eases the claims process. Trustees also must follow instructions for distributions and consider successor trustee protocols. We provide guidance to trustees on documentation practices that protect both beneficiaries and trustees by creating a clear paper trail of trust activities and decisions.
When the insured dies, the trustee files the death claim with the insurer, verifies policy ownership, and collects proceeds on behalf of the beneficiaries. The trustee then administers distributions according to the trust terms, which may include lump sums, staged payments, or directed uses for education and medical care. Proper coordination with other estate documents ensures that assets pass to intended recipients without unnecessary delay, and our firm assists trustees through the claims and distribution steps to make the process efficient and compliant with trust provisions.
An ILIT, or Irrevocable Life Insurance Trust, is a trust created to own and receive the death benefit of a life insurance policy. The grantor transfers ownership of the policy into the trust or has the trust purchase the policy, which removes the death benefit from the grantor’s estate for estate tax purposes when done properly. People consider an ILIT when they want to preserve the full value of life insurance proceeds for beneficiaries and provide structured distributions rather than leaving a lump sum to be handled through probate. Setting up an ILIT requires relinquishing certain ownership rights over the policy, so clients should weigh the tradeoffs between giving up control and gaining protection for proceeds. It also requires careful coordination with other estate planning documents to ensure policies are titled correctly and funding is arranged. With the right planning, an ILIT can be a useful component of a comprehensive estate plan, especially for those with larger estates or specific beneficiary protection needs.
Transferring a life insurance policy into an ILIT can remove the death benefit from the insured’s taxable estate, provided transfers are completed and ownership is relinquished outside of the lookback period and other IRS rules are observed. This can reduce estate tax exposure by keeping proceeds out of the estate calculation, which is particularly helpful for larger estates. However, timing rules and the details of how ownership is transferred are important to achieve the intended tax treatment. The trust must be properly structured and funded, and any premium payments must be documented to support gift tax treatment when applicable. Because tax laws change over time, it is important to periodically review the plan and consult about any adjustments needed to preserve the desired estate tax outcomes while ensuring compliance with reporting requirements.
The trustee of an ILIT should be someone who can manage fiduciary duties responsibly, make timely premium payments, keep accurate records, and follow trust distribution instructions. Many people select a trusted family member, close friend, or a corporate trustee depending on the complexity of the trust and the desired level of professional administration. A co-trustee arrangement can pair family oversight with financial or administrative support. Trustee selection involves assessing availability, financial acumen, impartiality, and willingness to serve. Successor trustee provisions are also important to ensure continuity in administration. Discussing trustee duties and expectations in advance helps prevent conflicts and prepares the chosen individual or entity to carry out their responsibilities effectively when the time comes.
Premiums for a policy owned by an ILIT can be paid in several ways, including direct payments from the grantor to the trust accompanied by gift notices, funding from other trust assets, or premiums paid by third parties. When the grantor makes gifts to the trust to cover premiums, the trust typically issues Crummey notices to beneficiaries so the gifts qualify for the annual gift tax exclusion. Proper documentation of these contributions and notices is important for tax reporting. If the trust owns a policy with cash value or paid-up status, the trustee may use trust assets to cover premiums. Clients should plan for premium funding during the drafting stage so the trust remains viable and the policy stays in force. Clear instructions reduce the risk of lapse and preserve the intended death benefit for beneficiaries.
A Crummey notice informs beneficiaries that they have a limited right to withdraw a recent gift contributed to the trust, which is a requirement in many cases to qualify the contribution for the annual gift tax exclusion. Although beneficiaries rarely exercise the withdrawal right, providing timely notice preserves the desired tax treatment and makes the gift eligible for exclusion. The notice typically specifies the amount and the period during which the withdrawal right exists. Proper administration of Crummey notices and accurate documentation of beneficiary consents or non-exercises of withdrawal rights are important for demonstrating to tax authorities that the gifts were legitimate annual exclusion gifts. Failure to follow these procedures can affect tax treatment and should be avoided by keeping thorough records and observing required notice windows.
An ILIT is irrevocable by design, meaning the grantor generally cannot unilaterally change its terms after creation. Because of that permanence, it is important to draft the trust carefully to reflect long term goals and to anticipate future circumstances. Some limited modifications may be possible through mechanisms such as trustee powers, decanting where permitted by state law, or consent of all beneficiaries, but these options are constrained and vary by jurisdiction. Given the limited ability to alter an ILIT, planners often combine the trust with other flexible documents like revocable living trusts and powers of attorney for lifetime changes. Regular reviews of the estate plan and insurance portfolio help ensure the overall plan remains aligned with evolving family needs and changes in law, while acknowledging the ILIT’s permanent nature.
An ILIT typically operates alongside a will and any revocable living trust, each serving different functions. A revocable trust remains flexible during the grantor’s life and can hold assets that may later pass to beneficiaries or be coordinated with an ILIT. A pour-over will can direct assets into a revocable trust at death, but it does not replace the ILIT for life insurance proceeds. Coordination among these documents is essential to prevent conflicting beneficiary designations and to ensure assets are directed in accordance with the overall plan. During estate administration, the ILIT functions independent of probate for the policy proceeds it holds, while other assets passing through a will may be subject to probate. Proper alignment of beneficiary designations and trust provisions reduces administrative complexity and helps ensure that assets are distributed according to the grantor’s intent without unnecessary delay or dispute.
When the insured dies, the trustee files a claim with the insurance company and, after verification, receives the death benefit on behalf of the trust. The trustee then administers distributions pursuant to the trust terms, which may require lump sum payments, staged distributions, or payments for specified purposes such as education or medical expenses. The trust structure allows the grantor to control timing and conditions for distributions to beneficiaries. Trust administration includes paying any relevant taxes or expenses and coordinating with other estate assets when necessary. Because the ILIT owns the policy outright, proceeds generally avoid probate and are distributed according to trust instructions, which can provide a faster and more private transfer to beneficiaries compared to probate distributions.
Beneficiaries do not always have to take distributions immediately from an ILIT; the trust terms determine timing and conditions. Grants often specify age thresholds, education milestones, or discretionary distributions for needs such as healthcare or housing. By controlling distribution timing, the grantor can protect assets from misuse and ensure funds are available to meet long term purposes like education or care for dependents. Trustees exercise their duties to manage funds and make distributions according to the trust language. If beneficiaries are given withdrawal rights for gift tax purposes, those rights are often limited and rarely exercised. Overall, the trust structure provides flexibility to tailor when and how beneficiaries receive support in line with family objectives.
An ILIT can be designed to provide for beneficiaries with special needs by directing funds into supplemental needs provisions or coordinating with a separate supplemental needs trust. The goal is to provide financial support without jeopardizing eligibility for public benefits. Trust language can limit distributions to supplemental items not covered by public programs while preserving necessary benefits, and trustees can be instructed to make distributions in a manner that supplements rather than replaces governmental assistance. Coordination is key: combining an ILIT with a supplemental needs trust or careful beneficiary design ensures that proceeds provide meaningful support without unintended loss of benefits. Trustees should be familiar with the relevant public benefits rules and manage distributions in a way that respects both the beneficiary’s needs and their program eligibility.
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