ILITs Can Provide Increased Life Insurance Distribution Control
Often, when a person with a life insurance policy dies, the benefits of the policy are paid out to the named beneficiaries in a large payment.
Such big payments can raise some concerns. For beneficiaries without the best financial habits, such a payment could be opening the door for a squandering of benefits. Receiving a big payment could also make a beneficiary a target of unscrupulous individuals who wish to deprive them of money. Also, for beneficiaries who receive government benefits, a big life insurance benefit payout could potentially disqualify them for the government benefits.
Thus, there are a variety of different situations that could cause a person to not want the cash benefits of a life insurance policy they have to be paid out to their beneficiaries in a large payment immediately after their death. They may wish to have more detailed control over benefits distribution.
One thing that can allow a person such control is having an Irrevocable Life Insurance Trust (ILIT). In such a trust, a person’s life insurance policy is placed in the trust and the trust’s terms control how the policy benefits will be distributed to the trust's beneficiaries when the person dies. As a note, ILITs can have other helpful uses beyond distribution control, including estate tax planning uses.
There are many distribution control terms a person could include in an ILIT, including terms making payouts dependent on beneficiaries meeting certain conditions, terms providing for monthly payouts of benefits to beneficiaries and terms outlining what discretion the trustee has when it comes to benefits distribution.
Exercising great care when it comes to what distribution control terms to include is very important when setting up an ILIT. Not picking terms that properly align with one's goals could result in the ILIT not achieving the purposes one was hoping it would. Also, putting an ILIT in place is a pretty permanent step, as ILITs are irrevocable, meaning that, generally, once they are formed, they cannot be terminated except through allowing the life insurance policy to end through lapsing. Attorneys can provide individuals interested in setting up an ILIT with guidance on whether an ILIT would be a good choice for them and how to set up an ILIT to achieve one's particular goals.
Source: FindLaw, "The Irrevocable Life Insurance Trust," Accessed Dec. 7, 2015.