Unlike revocable living trusts, where the grantor/insured is also the trustee during his or her lifetime, for an ILIT to work, the grantor/insured cannot be the trustee (because that would be an incident of ownership). “Incidents of ownership” also include the power to change the beneficiary, change the proceeds, cancel the policy, assign the policy, change the terms of the policy, or use it as collateral. Therefore, one of the major downsides of utilizing an ILIT is that once the policy is owned by the ILIT, the insured no longer has any control over it.
The premiums are paid by the ILIT using contributions made by the Grantor. This is another benefit of an ILIT – the Grantor can contribute an amount equal to the $15,000 yearly gift tax exclusion to the trust per beneficiary (which is not countable towards the $11.2 exclusion amount). The beneficiaries must have a right to withdraw the gift within a reasonable amount of time (called a Crummey power).
It is better to have the ILIT purchase the life insurance instead of transferring the policy to the ILIT because there is a three-year lookback period (meaning, if the owner dies during that three-year period, the policy proceeds are includable in the owner’s estate).
If you or someone you know would like more information about ILITs, please give Jesson & Rains a call.