Trustees have an array of responsibility when executing an Irrevocable Life Insurance Trust (ILIT). Knowing how to choose the right Trustee to manage the ILIT will save a lot of frustration,time, and money. In order to make that decision easier, this article will highlight what a trustee is supposed to do.
What is an ILIT?
An ILIT is a living trust that is established to own a life insurance policy. Individuals with large life insurance policies are sometimes, but not always, aware that their estate might include the insurance proceeds. Thus, the main purpose of an ILIT is to reduce or eliminate estate taxes. If you have a substantial life insurance policy, your attorney might suggest that creating one might be a good option.
To start, an irrevocable trust is created and names a trustee. The insurance policy is transferred into the trust and the trust now owns the policy. Since the trust is irrevocable, the original owner no longer has control over the policy. The creator of the ILIT cannot also serve as trustee. However, they can control how premiums will be paid, who will receive the benefits, and how the payments will be made to beneficiaries.
What is a Trustee's responsibility?
There are three different types of trustees individual, bank, and independent. An individual trustee, is usually a family member or friend. A bank trustee, is attached to a bank trust department. An independent trustee, is a trustee that is not tied to a bank. Independent and bank trustees are trust companies that manage, invests, and administers the trust assets. Though there are many different types of trustees, their responsibilities remain the same. A trustee has 5 main responsibilities of administering an ILIT.
- Pay insurance premiums
- Administering the ILIT
- Annual notifications by crummey letters
- ILIT tax returns
- Distributions of the life insurance proceeds
The type of trustee you choose will implement different roles. For example, an independent trustee, Wealth Advisors Trust Company, only administrates the ILIT. In the trust document the Grantor provides the direction, chooses the investment manager, and is released from burden of responsibility.
New estate tax limits
The new tax limits increased the estate and gift tax exemption to 11.4 million per person. This means that each individual can pass $11.4 million dollars to heirs and pay no federal or gift tax. Married couples can have up to $22.8 million shielded from taxes. The exclusion from gift tax is still $15,000, but this all may increase next year to counter inflation.
Wealthy individuals are constantly looking for ways to shelter themselves from hefty tax bills. If the insured of the life insurance policy in an ILIT also serves as trustee, then the IRS may decide the policy has not left the estate. This could have a significant impact on an estate tax liability.
Want to use a Corporate Trustee?
When picking a trustee, a corporate trustee might be a good option. Your estate attorney can help guide your decision. Corporate trustees offer many benefits. They give individuals more choice and control over how the trust is invested and administered. Which ever trustee an individual chooses to manage their ILIT, should understand what the responsibilities are. Knowing this will be helpful when deciding whose going to manage the trust assets.