Don’t just buy life insurance—be strategic about it

| October 06, 2023

Many people don’t put a lot of thought into their life insurance. They choose it, pay the premiums, and tend to think of it only in terms of providing financial security for the policy’s beneficiaries. But it might be worth your while to be more strategic and think of your life insurance as part of estate planning.

Some people set up what’s called an irrevocable life insurance trust (ILIT) to hold the policy. If properly set up, an ILIT can help maximize the benefits of their policy.

One of the main reasons for setting up an ILIT is asset protection. When the policy is in an ILIT, it’s protected from creditors and potential legal claims. If you have a higher risk for being sued because of your profession—think attorneys, doctors, brokers, contractors, and so on—this might be an important aspect. Of course, it’s also an important benefit if you have a lot of debt.

Another main reason for having an ILIT is to reduce potential estate taxes. That’s because with this type of trust, the IRS doesn’t consider the proceeds from the life insurance policy part of your estate for federal estate tax purposes—as long as you don’t retain certain rights or control over the trust.

A third benefit is that it gives you control over the distribution of the death benefit. You can specify, for example, that you want the funds to go toward education. But I think one of the more important reasons to control the death benefit’s distribution through an ILIT is so that the death benefit doesn’t interfere with the beneficiaries’ access to important government benefits such as Social Security or Medicaid. Without an ILIT, when the beneficiary receives the proceeds, they might become ineligible for these benefits and can only access these programs after spending all the money from the policy.

Because an ILIT is irrevocable, you can’t change it easily. So make sure you have a good team working together to make sure the ILIT is set up and functions properly.

The attorney you use should have the proper experience drafting these types of agreements and be familiar with the language required for detailing the trust’s terms. Besides the terms, the agreement will include the beneficiaries, the distribution schedule, and any conditions you want to specify. It's also important to have a trustee you’re confident will manage the ILIT and distribute the proceeds properly.

After creating the ILIT, you transfer your policy’s ownership to the trust. You’ll also need to make sure the ILIT has funding to pay the policy premiums. One way to do this is to make annual gifts to the trust.

If you might be a good candidate for an ILIT, talk to your financial team about it. There’s a lot of other regulations I didn’t go into here, including the legalities covering the payment of premiums and something called a “three-year lookback period” that could cause the death benefit to be included in your estate. So creating and managing ILITs require some expertise, but they can be a smart way to help make sure your life insurance policy meets your intentions for the people you want to take care of.



Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or   Read more of his insights at Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC.  Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through  an Avantax affiliated insurance agency.  6260 Lake Osprey Dr. Lakewood Ranch, FL 34240.  The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries.  Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.  An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.  CDs are FDIC insured and offer a fixed rate of return.  They do not necessarily protect against a rising cost of living.  The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value.  Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.