Trusts have become an extremely popular addition to the average estate plan in recent decades. In fact, trusts have evolved to the point where there is a specialized trust to fit almost any estate planning goal. One such trust is an irrevocable life insurance trust, or ILIT. If you are considering the inclusion of an ILIT in your estate plan, you may be wondering if a beneficiary can also be the Trustee of an Irrevocable Life Insurance Trust.
What You Need to Know about Trusts
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also called a Maker or a Grantor, who transfers property to a Trustee. The Trustee holds that property for the trust beneficiaries. The beneficiary of a trust can be an individual, an entity (such as a charity or political organization), or even the family pet. A trust must have at least one beneficiary but may have an unlimited number of beneficiaries. All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason once active.
What Is an Irrevocable Life Insurance Trust?
As a general rule, life insurance proceeds pass to the named beneficiary free of any income tax; however, what many people do not realize is that the payout from a life insurance policy is generally included in the “gross estate” of the policy owner for estate tax purposes at the policy owner’s death and is potentially subject to federal and state estate taxes. At a tax rate of 45 percent, gift and estate taxes should be avoided whenever possible. An ILIT takes advantage of a loophole created by Congress. If an ILIT is created to own the life insurance policy and the proceeds of the life insurance policy are payable to the trustee of the ILIT upon the insured’s death, then the proceeds are not included in the insured’s estate and, therefore, are not taxable for federal estate tax purposes. This applies even though the insured gives the money to the trustee of the ILIT to pay the annual premiums of the life insurance policy.
Can a Beneficiary Be the Trustee of an ILIT?
When you create a trust, you must appoint someone to be the Trustee of the trust. The Trustee has many duties and responsibilities; however, in general, a Trustee is responsible for managing trust assets and administering the trust using the terms created by the Settlor. While there is no legal impediment to a beneficiary also serving as the Trustee of an irrevocable life insurance trust, it is often not a good idea, particularly if there are additional beneficiaries as well. The likelihood of a conflict arising increases exponentially under such circumstances. By the same token, the Settlor cannot be the Trustee because that results in the Settlor having an incident of ownership in the life insurance policy which, in turn, means that the policy proceeds would be taxed in the estate of the Settlor upon his or her death.
Contact Illinois Trust Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding an Irrevocable Life Insurance Trust in the State of Illinois, contact the experienced trust attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.