Irrevocable life insurance trusts (ILITs) can be a great estate planning tool under the right circumstances. ILITs have the added benefit of providing significant asset protection.
Life insurance owned by an ILIT is not generally part of the insured’s estate (for both federal and Ohio estate tax purposes). An ILIT will be most effective if it is formed prior to acquisition of the life insurance policy. The ILIT directly purchases the insurance policy or policies. If the ILIT is formed properly creditors of both the settlor (the person establishing the trust) and the beneficiaries should have no rights in either the cash value or the death benefits of the insurance.
Assets of an ILIT should also generally be immune from claims in a divorce or dissolution of marriage. An ILIT (unlike certain other trusts such as so-called marital deduction trusts, credit shelter trusts and/or QTIP trusts) may also provide for termination of a spouse’s interest in the event of remarriage.
Whether or not an ILIT is suitable depends on the particular facts and circumstances. Moreover, the insured has to effectively give up control of the assets held in this type of trust; and the fees and expenses to set up such a trust also have to be considered. In some circumstances, however, an ILIT can be a valuable estate planning tool, and also provide significant asset protection opportunities.
An ILIT is definitely not going to constitute a complete asset protection plan. But it may be very useful as one of the components of such a plan.