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Irrevocable Life Insurance Trusts (ILITs)

Irrevocable Life Insurance Trusts (ILITs) are an increasingly popular estate planning tool in California, and for good reason. A well-structured ILIT can provide a number of benefits, including tax savings, asset protection, and more. In this article, we’ll explore what ILITs are, how they work, and why they’re becoming so popular in California.

What is an Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust (ILIT) is a legal entity that is established to own and manage a life insurance policy. The ILIT is created through a trust agreement and is funded by the policy owner, who gifts the policy to the trust. Once the policy is gifted to the trust, the policy owner loses control over the policy and cannot make changes to it. This is what makes the trust “irrevocable.”

How does an ILIT work?

An ILIT is designed to provide benefits to the policy owner’s beneficiaries, such as tax savings and asset protection. When the policy owner dies, the death benefit is paid to the trust, which uses the proceeds to pay out to the beneficiaries. The death benefit is typically free from federal estate tax, which can be a significant advantage for estates that are subject to estate tax.

In addition, the death benefit can be used to pay off debts or provide for the policy owner’s surviving spouse, children, or other beneficiaries. Because the death benefit is paid directly to the trust, it does not pass through the policy owner’s estate, which can help to reduce the overall size of the estate and minimize estate tax liability.

Why are ILITs becoming popular in California?

There are a number of reasons why ILITs are becoming increasingly popular in California. One of the main reasons is the high cost of living in the state, which can make it difficult for families to pay for end-of-life expenses, especially if the estate is subject to estate tax.

In addition, the state’s tax laws can be complex and difficult to navigate, making it important for families to have a solid estate plan in place. An ILIT can provide a level of protection and tax savings that other estate planning tools simply cannot match.

Another reason for the popularity of ILITs in California is the state’s strong tradition of innovation and entrepreneurship. Many entrepreneurs and business owners in the state are looking for ways to protect their assets and provide for their families after they’re gone, and an ILIT can help them achieve these goals.

Finally, the COVID-19 pandemic has also played a role in the popularity of ILITs in California. As people have become more aware of their own mortality, they’ve become more interested in protecting their assets and providing for their families after they’re gone. An ILIT can help provide peace of mind for these individuals and their families.

In conclusion, Irrevocable Life Insurance Trusts are a valuable estate planning tool for California residents looking to protect their assets, minimize their tax liability, and provide for their families after they’re gone. With their many benefits and the support of a professional advisor, ILITs are a smart choice for anyone looking to secure their financial future.