5 Tips You Should Know About An Irrevocable Life Insurance Trust in South Dakota

People buy life insurance for many reasons. In some circumstances, it offers unique features that are not found in other estate planning opportunities. Here are 5 tips you should know about an Irrevocable Life Insurance Trust.

Tip #1 - What is an Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust (ILIT) is created to own and control a term or permanent life insurance policy while the insured is alive, as well as to manage and distribute the proceeds that are paid out after the insured's death. An ILIT has several parties - the grantor, trustees, and beneficiaries. The grantor typically creates and funds the ILIT. Gifts or transfers made to the ILIT are permanent, and the grantor is giving up control to the trustee. The trustee manages the ILIT, and the beneficiaries receive distributions.

Tip #2 - What is an ILIT's impact on estate taxes?

If you are the owner and insured, then the death benefit of a life insurance policy will be included in your gross estate. However, when life insurance is owned by an ILIT, the proceeds from the death benefit are not part of the insured's gross estate and not subject to state and federal estate taxation. If properly drafted, an ILIT may also provide liquidity to help pay estate taxes, as well as other debts and expenses, by purchasing assets from the grantor’s estate or through a loan. 


Tip #3 - Can an ILIT assist with asset protection?


Possibly. Each state has different rules and limits regarding how much cash value or death benefits are protected from creditors. Any coverage above these limits held in an ILIT is generally protected from the creditors of the grantor and/or beneficiary. South Dakota has some of the nation's best creditor protection laws. 


Tip #4 - Can an ILIT assist with a beneficiary retaining government benefits? 


Yes. Saving the proceeds from a life insurance policy owned by an ILIT can help protect the benefits of a trust beneficiary who is receiving government aid, such as Social Security disability income or Medicaid. The Trustee can carefully control how distributions from the trust are made so as not to interfere with the beneficiary's eligibility to receive government benefits.​


Tip #5 - How can an ILIT make beneficiary distributions flexible?


An ILIT's trustee can have discretionary powers to make distributions and control when beneficiaries receive the proceeds of your policy. The insurance proceeds can be paid out immediately to one or all of your beneficiaries. Or you can direct how and when beneficiaries receive distributions.


The trustee can also have the discretion to provide distributions when beneficiaries attain certain milestones, such as graduating from college, reaching a certain age, buying a first home, or having a child. It’s really up to you. This can be useful in second marriages to ensure how assets are distributed or if the grantor of the trust has children who are minors or need financial protection.


In sum, ILITs can be very useful tools in many estate plans to help ensure that your policy is used in the best possible way to benefit your family.


For more information about estate planning in South Dakota, download a free copy of our law firm's popular book - Estate Planning in South Dakota: Creating a Lasting Legacy™​.