Our Skilled Estate Planning Attorneys Discuss the Benefits of a New York Irrevocable Life Insurance Trust
A life insurance policy provides assurance and confidence that when you die, your family will have a level of financial security and stability. This type of policy can offer a financial safety net for grieving families, allowing them to cover funeral expenses and potentially replace some of your income. However, big death benefits can be a disadvantage when they’re accounted for in an estate plan. 
The experienced estate planning attorneys at Landskind & Ricaforte Law Group, P.C. could help you protect your family’s inheritance with an irrevocable life insurance trust—a special arrangement that lets you minimize taxes while retaining the right to decide how, when, and where the proceeds from your estate plan will be distributed. Here, our lawyers discuss this type of trust, the advantages of establishing one, and how it protects your legacy.
An Overview of New York Irrevocable Life Insurance Trusts
Not many people realize that the money from a life insurance policy is considered an asset of their overall estate. Even though that money isn’t distributed to the named beneficiary until after death, it is still subject to estate taxes. It’s possible that over 40% of the policy value can be claimed by taxation. Thus, the amount you may have planned to leave to a beneficiary will be greatly reduced.
However, our estate tax planning attorneys can help you establish an irrevocable life insurance trust (ILIT), so you can avoid tax pitfalls and help ensure that your beneficiaries receive all insurance benefits they’re entitled to.
Understanding New York Trusts: an Agreement Between Parties
An ILIT is a type of trust designed to hold life insurance policies. This type of trust serves a very specific purpose, but it relies on many of the same rules and principles that underpin other types of trusts. So, although ILITs always differ in details, all trusts share some common characteristics. Every trust can, for instance, be considered an agreement between different parties. These parties typically include the following:
- The grantor. The grantor is the person or party who establishes and funds a trust. In the context of an ILIT, funding can take the form of both life insurance policies and the money needed to pay each policy’s premium.
- The trustee. The trustee is the person or party who administers the trust’s affairs. Trustees are bound by a legal “fiduciary duty,” which means they are legally obliged to manage trust assets in accordance with the trust’s purpose and in the best interest of the trust’s beneficiaries.
- The beneficiary. The beneficiary, or beneficiaries, are the people you choose to inherit trust assets. Almost anyone can be the beneficiary of an ILIT, but selecting close relatives could help you take advantage of important gift tax exclusions.
Trusts are usually described as “arrangements” because trusts aren’t independent entities. Instead, when you form an irrevocable trust, your appointed trustee becomes the owner of any assets held or controlled by the trust.
However, this doesn’t mean that the trustee can do as they please with your policies. Instead, they must abide by all of the terms you set when forming the trust, and they can be held liable for any acts of mismanagement or breaches of fiduciary duty.
Two Types of New York Life Insurance Trusts: Revocable and Irrevocable
If you’re considering a life insurance trust, you’ll have to make a decision about what type of trust is best for you and your family: revocable, or irrevocable.
A revocable life insurance trust is a trust that you establish while you’re still alive. Since the trust is revocable, you can change its terms—or revoke it in its entirety—whenever you choose.
Unlike revocable life insurance trusts, the terms of an ILIT cannot typically be changed, revoked, or otherwise altered—not by you, not by your trustee, and not by your heirs.
Understanding the Advantage of Irrevocability
Revocable and irrevocable life insurance trusts can be used to accomplish many of the same goals. These include:
- Avoiding probate
- Streamlining estate and trust administration
- Keeping the terms of an heir’s inheritance out of the public record
However, irrevocable life insurance trusts offer a significant advantage over their revocable counterparts. Since “irrevocability” means you can’t make changes to the trust, the government will usually distinguish between a deceased person’s estate assets and a deceased person’s trust assets. This distinction can have massive implications for New Yorkers worried about paying estate taxes or providing an inheritance to a loved one with special needs.
5 Benefits of a New York City Irrevocable Life Insurance Trust
Establishing an ILIT could make sense for anyone whose life insurance policy poses a risk to the sanctity of their estate or the well-being of their heirs. An ILIT could help you with the following:
1. Anticipate and Mitigate Estate Taxes
New Yorkers face two big threats when it comes to structuring their estates: the state estate tax and its federal counterpart.
Both modes of taxation are levied on all estates that exceed an inflation-adjusted value. They are also progressive, meaning that higher rates are charged on higher-value estates. Expensive life insurance policies can easily push large estates above the state threshold, the federal threshold, or both—potentially cutting tens or hundreds of thousands of dollars from an heir’s expected inheritance.
ILITs ease the burden of these expensive policies by separating life insurance proceeds from the grantor’s estate, reducing its tax basis and, potentially, negating the threat of taxation in its entirety.
2. Keep Your Assets Safe From Creditor Claims
During probate, creditors have the opportunity to submit claims on the decedent’s outstanding debt. Life insurance proceeds are typically protected from these claims, but certain types of legal judgments and settlements could give creditors the right to go after death benefits.
ILITs provide enhanced asset protection against creditor claims by removing them from your estate altogether.
3. Leverage Gift Tax Exclusions
You can’t exclude most contributions to an irrevocable trust. However, some ILITs can be configured in a way that lets beneficiaries make limited, structured withdrawals from the trust before receiving their full inheritance. If your heirs agree, and they make use of their right, some contributions can be claimed under the gift tax exclusion.
4. Protect a Family Member’s Government Benefits
You don’t need to be a millionaire to get benefits out of ILIT. If you have a child, grandchild, or other loved one with special needs, leaving a typical cash- or asset-based inheritance isn’t always ideal. Since Medicaid, Social Security Disability Insurance (SSDI), and other government programs often consider income when determining eligibility, a sudden windfall can leave heirs without access to critical benefits.
Establishing an ILIT lets you work around income rules and asset limits: it lets the trust retain control over insurance proceeds, which can be distributed in a way that won’t cause eligibility issues.
5. Structure Inheritances
You can’t change the terms of an ILIT, but you still have a right to condition how insurance proceeds should be used and, eventually, redistributed.