With an irrevocable life insurance trust, you can make your estate easier to manage, thanks to the immediate liquidity the policy creates when you die. This rather unique trust arrangement can also help you use your policy’s cash value without triggering substantial gift taxes.
Forming an irrevocable life insurance trust makes the most sense for individuals who have an estate that includes substantial illiquid assets, like closely-held business or real estate properties. It can also be beneficial for someone who wants to leverage their policy’s cash value as collateral for a loan or other financial uses.
Reach out to an Albuquerque irrevocable life insurance trust lawyer to learn more about the most advantageous estate planning arrangements you could select for the benefit of your loved ones. You can schedule a no-obligation consultation and estate plan review with New Mexico Financial Law today when you call 505-503-1637 or contact us online.
Like most types of trusts you can form in Albuquerque, an irrevocable life insurance trust can be highly customized. You can potentially use the trust to pay for the policy’s premiums without triggering gift taxes.
You can also allow the trust to hold onto death benefits once they have paid out, which can be beneficial if your goal is asset protection or preventing issues with a beneficiary’s ability to qualify for needs-based government programs.
By working with an Albuquerque irrevocable life insurance trust attorney, you can go over all of your options in detail. Your attorney will help you consider the trust in the context of your larger estate portfolio and overall estate plan.
During your confidential, no-obligation consultation, they can help you answer questions like the following:
The best approach to using these types of trusts is to thoroughly go through all the options and opportunities they present. You can rely on your Albuquerque irrevocable life insurance trust attorney to help you understand the most important factors for your trust and organize it so that you can succeed in your goals, providing your loved ones with financial security long after you are gone.
An irrevocable life insurance trust (also sometimes called an ILIT) involves all of the familiar roles from other types of trusts you might see in Albuquerque:
The thing that makes an irrevocable life insurance trust special can be found right within its name: the trust is irrevocable, and its primary purpose is to contain a life insurance policy.
A life insurance policy typically covers the owner of the policy, but the policy owner and the covered person can be different. Once your life insurance policy is created, you have the option to transfer its ownership, including to a trust.
Alternatively, you can list the trust as the owner when you apply for the policy, after you have received approval for coverage.
Importantly, the transfer of the policy has to occur at least three years before your death. Otherwise, the policy benefit automatically reverts to your estate (or, potentially, a previously selected beneficiary, if you had chosen one before naming the trust as a beneficiary).
A common arrangement for an ILIT is for the trust to be the sole beneficiary of the death benefit for the life insurance policy. Once the death benefit is paid to the trust, the trustee can use the immediate cash infusion to cover administrative expenses for your estate.
For example, an estate might have a property with a high value that the grantor would prefer not to liquidate after their death, such as a family residence. Or, in some cases, the property might be “underwater,” meaning it would trigger a debt rather than a net profit if it were sold immediately after their death.
With a death benefit deposited into an ILIT, the trustee could pay off the property to make it unencumbered. Or, they could buy out the beneficiary’s share of the property with cash, preventing the need to liquidate it to compensate them duly for their inheritance.
ILITs can also be beneficial for someone who owns closely held business property. Sometimes, their death may trigger the need for the business to liquidate assets in order to pay the expected distribution of its value to beneficiaries or to cover other estate administration costs.
More generally, irrevocable life insurance trusts can be beneficial since they can simplify the division of the death benefit, which could otherwise be a complicated affair.
The grantor should ensure that they include enough cash (or assets that can be liquidated) within the trust to fully cover the premiums for their life insurance policy. However, covering the premiums can be a taxable event, unlike the benefit payout itself.
Because the premiums are indirectly benefiting a beneficiary, each payment could count as a “completed gift” to the final beneficiary, triggering a gift tax each time.
To avoid this situation, the trustee can instead make the value of the premium available to a beneficiary for immediate withdrawal. Sending a beneficiary a letter (known as a Crummey letter) notifying them of their right to withdraw makes the gift count as a “present interest” that can deduct from the grantor’s annual gift tax exclusion, rather than their lifetime exemption.
If the beneficiary declines their immediate right, the premium amount can remain within the trust, funding the life insurance policy.
In 2025, the annual gift tax exclusion amount is $19,000. This amount could potentially be doubled if the irrevocable life insurance trust is jointly owned by a married couple.
The trustee, at their discretion, can be allowed to use the cash value of the life insurance policy to take out a loan. They can also surrender or sell the policy, as needed, to optimize the investment activities and asset mix within the irrevocable life insurance trust.
These options give them the flexibility to manage the asset portfolio of the trust and enable substantial growth.
If you intend to include a grandchild or anyone else 37.5 years or more younger than yourself as a beneficiary of an irrevocable life insurance trust, be sure to use some of your lifetime exemption for generation-skipping transfer taxes.
GST taxes use a separate exemption amount from your lifetime gift and estate exclusion. These taxes also apply on top of estate taxes, so without them, your young beneficiaries could be taxed twice.
If you do not wish to immediately distribute the death benefit of your policy to beneficiaries, you can allow it to remain in the trust. These proceeds could be used to fund further investments, generating additional income for beneficiaries.
They can then receive distributions on a regular basis, rather than as one lump sum.
You also have the option to instruct the trustee to reserve distributions — or to make an extra-large distribution — when a special circumstance occurs. For example, you could reward a relative for graduating with a trust distribution.
Or, you can reserve their distribution for a life event, such as their marriage, their purchase of a first home, or the birth of a child.
A charity can be named as a beneficiary for an irrevocable life insurance trust. Any donation to an IRS-recognized charitable organization can potentially allow the trust to deduct from its yearly income amount, offsetting the costs of any income generated from asset growth.
An ILIT can be particularly ideal for a situation where paying out a life insurance benefit would normally cause someone to be disqualified for a needs-based benefits program, such as disability insurance or Medicaid. An irrevocable trust may be allowed to provide a certain amount to these individuals for their living expenses without adding to their calculable resources.
The trust may also be able to pay directly for certain health or living expenses without similarly adding to resources.
This arrangement is typically used for disabled beneficiaries (who may want to qualify for Social Security Disability Insurance, or SSDI) or elderly ones (who may want to qualify for Medicaid benefits for long-term services and supports, or LTSS).
Life insurance benefits can be tricky to navigate, from an estate planning perspective, because of specific rules that can cause them to immediately qualify as part of your estate.
For example, the grantor should not name the personal representative of their estate as a beneficiary for the trust. Doing so could cause the proceeds to be included as part of their estate, which could subject them to creditor claims.
Further, the trustee should be given discretion as to whether to use the cash value of the policy to borrow against or sell the policy and generate proceeds, rather than being required to do so at some point in time.
If a spouse of the grantor is listed as a beneficiary, the trust may immediately qualify as a grantor trust. This designation means that the grantor must report all trust income as their own, during their lifetime, and pay appropriate income taxes on the proceeds.
This arrangement may be desirable, however, as the grantor may be able to pay taxes at a lower rate compared to the trust.
Alternatively, the grantor could take care that the trust does not generate income. They can opt not to sell any securities in the trust, for example, until the death benefit is paid, while only using non-income-generating assets like non-taxable municipal bonds.
Refer to an Albuquerque trust law firm for more important details to be aware of and to plan ahead for possible challenges.
Because the policy benefit itself cannot be taxed and because they are seen as a relatively stable asset, life insurance policies can be an extremely beneficial asset to include in an investment portfolio. Placing that policy in an irrevocable trust can provide further benefits for your estate, your loved ones, and the legacy you want to leave behind.
New Mexico Financial Law can work closely with you to help you uncover the best irrevocable life insurance trust arrangement for your unique portfolio and estate planning goals. Discuss your opportunities with our Albuquerque irrevocable life insurance trust law firm when you call 505-503-1637 or contact us online to schedule a no-obligation consultation today.
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