An irrevocable life insurance trust in Oklahoma is a trust created to be the owner and beneficiary of life insurance policies with the intent of keeping the life insurance proceeds out of the insured’s estate. Often referred to as an ILIT, if properly created it can accomplish this goal. Four things to keep in mind when establishing an irrevocable life insurance trust:
- The insured must have no ownership rights in the policy;
- The insured must not be a beneficiary of the policy; and
- The insured must not be the trustee of the trust;
- The trust and all transfers are irrevocable and cannot be changed.
When an insured transfers an existing insurance policy into the ILIT, the IRS will consider it a gift, and if the insured dies within three years of making the transfer, then the IRS will include all the assets of the trust in the deceased’s estate.
Upon the death of the insured, the trust can be set up to either distribute the proceeds outright to the beneficiaries, or it can hold onto and administer the funds for those who may not be able to manage the funds, such as minors.
Some problems with irrevocable life insurance trusts:
- Administrative costs;
- Insured does not have access to cash value of life insurance policy;
- Cannot be used for Insured’s benefit, such as inability to borrow against the policy;
- Risk of indefinite future policy payments, or a poor performing insurance product.
Administrative costs include the cost of establishing the trust, the costs of having a trustee manage the trust yearly, a separate tax identification number must be obtained. If the trust’s income exceeds the standard deduction for trust, currently $100, then annual income tax returns are required. Annual notices to beneficiaries may also be required.
Of course any life insurance product needs to be evaluated like any other financial investment decision to determine if it makes financial sense.
This article was written 1/25/2015 by Todd Willhoite, an estate planning attorney in Claremore, specifically for the Oklahoma jurisdiction. A different result may occur in a different jurisdiction and the law does change, so it is important to seek competent legal and tax advice from professionals before acting on anything written in this article. Abby Law Offices Inc. is a law office that handles estate planning law in Claremore, Oklahoma.