Life Insurance Trust | Florida | The Law Office of Jordan W. Jacob

The Law Office of Jordan W. Jacob

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Irrevocable Life Insurance Trust.

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In Florida, estate planning is one of the best ways to protect assets and ease the burden on your loved ones after your death. One useful estate planning tool is an Irrevocable Life Insurance Trust (ILIT), which allows a Florida resident to qualify for Medicaid, avoid estate taxes upon death, and protect the insurance policy payout from creditors.

Stick family receives life insurance proceeds
Stick family receives life insurance proceeds

In Florida, estate planning is one of the best ways to protect assets and ease the burden on your loved ones after your death. One useful estate planning tool is an Irrevocable Life Insurance Trust (ILIT), which allows a Florida resident to qualify for Medicaid, avoid estate taxes upon death, and protect the insurance policy payout from creditors.

How an Irrevocable Life Insurance Trust works

An ILIT is created to own a life insurance policy, generally on the life of creator of the trust (the “grantor”), for the benefit of the grantor’s spouse, children or other loved ones (the “beneficiary” of the trust). Ownership of an existing life insurance policy can be transferred into the ILIT after it has been created, or the ILIT can be formed to purchase a new policy on the life of the grantor.

Because an ILIT is irrevocable, the trust cannot easily be modified, amended or terminated. In addition, the grantor does not control the trust itself and, therefore, must appoint a trustworthy individual to serve as trustee of the trust. Likewise, the grantor does not own the insurance policy, but rather the ILIT serves as the owner.

To gain the most benefit of an ILIT, the trust should be designated as the primary beneficiary of the insurance policy and the grantor’s spouse, children or other loved one should be named as the beneficiaries of the trust.

When the grantor passes away, the life insurance death benefits are distributed to the trust and held for the benefit of the trust’s beneficiary. If the trust’s beneficiary is the grantor’s surviving spouse, the spouse can elect to receive the insurance proceeds in incremental payments rather than one lump sum in order to avoid death taxes on the spouse’s estate after the spouse’s death.

Benefits of an Irrevocable Life Insurance Trust

Minimize Estate Taxes

If you are the owner and insured on a life insurance policy, the death benefit of your policy will be included in your gross estate. However, when a life insurance policy is owned by an ILIT, the proceeds from the death benefit are not part of the insured’s gross estate and, thus, not subject to estate taxation.

If properly drafted, the ILIT can help pay an insured’s estate taxes, as well as other debts and expenses.  This is accomplished by purchasing assets from the grantor’s estate or through a loan. Also, lifetime gifts – such as transferring money into the ILIT to pay for the life insurance premiums – can help reduce your taxable estate.

Avoiding Gift Taxes

A properly drafted ILIT can help avoid gift tax consequences since contributions by the trust grantor are considered gifts to the beneficiaries. To avoid gift taxes it is crucial that the trustee, using something called a “Crummey letter”, notify the beneficiaries of the trust of their right to withdraw a share of the contributions for a 30-day period.

After the expiration of 30 days, the trustee can use the monies gifted to the trust to pay the insurance policy premium. The Crummey letter qualifies the transfer of monies for the annual gift tax exclusion by making the gift a present rather than future interest, thus avoiding the need in most cases to file a gift tax return.

In 2021, an individual can give up to $15,000 a year and a married couple can gift up to $30,000 year, without any tax implications, to as many recipients as they choose.  Therefore, an ILIT grantor can gift up to the gift tax exclusion limit to their trust to pay for the life insurance policy premium and not have any personal tax consequences.

Government Benefits

Another benefit of an ILIT is that the proceeds from a life insurance policy owned by an ILIT can help protect a trust beneficiary who is receiving government aid, such as Social Security disability income or Medicaid. The trustee of the ILIT can carefully control how distributions from the trust are used so as not to interfere with the beneficiary’s eligibility to receive any government benefits.


The trustee of an ILIT can be given discretionary powers to make distributions and control when trust beneficiaries are to receive the proceeds of the insurance policy after the insured’s death. The insurance proceeds can be paid out immediately or spread out over a defined time period.

The trustee can also be given the discretion to make distributions when trust beneficiaries attain certain benchmarks or milestones, such as graduating from college, buying a first home, or having a child.

Using an ILIT can be especially useful in second marriages and belnded families to ensure assets are distributed to children from a previous marriage or underage beneficiaries that need more protection.     

Legacy Planning

An ILIT can also be used for granparents to take advantage of the generation skipping transfer tax (GSTT) laws when they desire to gift monies to their grandchilren. 

The GSTT imposes a tax of 40% on both outright gifts and transfers in the trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor.

An ILIT helps leverage the grantor of the trust’s GSTT exemption by using gifts to the trust to buy and fund a life insurance policy. Since the proceeds from the policy’s death benefit are excluded from the grantor’s estate, multiple generations of the family—children, grandchildren, and great-grandchildren—may benefit from the trust assets free of both estate tax and generation skipping transfer tax.

Drawbacks of an Irrevocable Life Insurance Trust

It is Irrevocable

The first drawback of an ILIT is that the the trust is irrevocable.  This means that the grantor cannot make any changes after the trust is created.  Therefore, careful planning is necessary to ensure the trust’s flexibility for future changes.

Loss of Control

A second drawback of an ILIT is that the grantor does not have control of the trust after it is created.  In order to receive the benefits described above, the grantor cannot also serve as the trustee and must appoint an independent trustee to manage and control the trust during and after the grantor’s lifetime.  Therefore, careful consideration must be taken by the grantor to chose a trustworthy individual or corporate fiduciary to manage the trust. And, to chose one or two successor trustees…just in case.

Not Ideal for the Short Term

Another complication of using an ILIT is that if the grantor dies within three (3) years of transferring an existing life insurance policy into the ILIT, the IRS will include the death proceeds in the grantor’s estate for estate tax purposes. However, this can be avoided by having the ILIT purchase a life insurance policy on the grantor’s life, then funding the trust with sufficient money over the course of the grantor’s life in order to pay the yearly insurance premiums.

Tax Considerations

Irrevocable trusts, like an ILIT, have a separate tax identification number and a very aggressive income tax schedule. However, the cash value accumulating in a life insurance policy is free from taxation as is the death benefit. So there are no tax issues with having a policy owned in an ILIT.

If properly designed, an ILIT can allow the trustee access to the accumulated cash value, by taking loans and/or distributions on a cost basis, even while the insured is alive. However, once a death benefit has been paid, if the proceeds remain in the trust, any investment income earned and not distributed to the beneficiaries could be taxed at a higher tax rate.

Generally, the benefits of an irrevocable life insurance trust outweigh the potential drawbacks.  An ILIT can be a very useful estate planning tool for high income earners and those with high net worth who are looking to help avoid any potential gift or estate taxes.  It can also be useful for older generations to ensure protected inheritances to younger generations.

If you have any questions about creating an irrevocable life insurance trust in Florida, or about any other estate planning tools, contact me today.

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