In Texas, you have the right to transfer your assets to your family members or beneficiaries when you pass away. However, the state and the federal governments will impose taxes on the property you leave behind, ultimately reducing your beneficiaries’ amount. Take a look at how an irrevocable life insurance trust might help and also its potential downsides.
Understanding an irrevocable life insurance trust, or ILIT
An ILIT is an estate planning tool that shelters your beneficiaries from paying high taxes after your death. A trustee, which can be an individual or organization, will hold and manage that property for your heirs. The trustee will be responsible for the administration, investments and accounting involved with the trust.
Pros of an irrevocable life insurance trust
- It protects your beneficiaries from creditors, divorce or any other legal entanglement they may be involved in after your death.
- If your beneficiaries are not yet financially experienced, an ILIT can protect them by helping to manage their trust for them while they acquire the necessary knowledge they need. You can specify that your child will start receiving their share after they reach a certain age or maybe after they complete college, just to make sure that they are responsible enough to take care of themselves and their property.
- This estate planning tool can also protect the inheritance of your children in case your surviving spouse remarries.
- It shelters your beneficiaries from paying high state and federal taxes while receiving their inheritance.
Cons of an irrevocable life insurance trust
- One major disadvantage of this trust is that you are giving a trustee full control over your property and not your beneficiaries or you.
- The trust is irrevocable, which means that once you set it up, you cannot modify it.
- You need to consider the cost of establishing an ILIT and maintaining it.
Primarily, the disadvantages of an ILIT pale in comparison to the potential benefits your beneficiaries will receive from it. This type of trust may be something that you should consider when planning for the future of your loved ones after your death.