A life insurance policy can hold significant value. If you live in New Jersey and own substantial assets, who owns that policy may affect your estate plan. Ownership may influence estate size and access to funds later.
Because of this, you may consider an irrevocable life insurance trust, often called an ILIT. In this structure, the trust holds the policy instead of you. Then a trustee manages the policy and follows written instructions for the proceeds. As a result, the structure may change how life insurance fits within your overall estate planning approach.
Role of an irrevocable life insurance trust in estate planning
When you place a life insurance policy in an ILIT, the trust holds the policy, and a trustee manages it. The trustee follows instructions written in the trust document.
This structure may support several estate planning considerations. For instance, you may review an ILIT when you want to consider the following:
- Separating policy ownership from other estate property
- Directing benefit distribution through written trust terms
- Supporting financial planning for younger beneficiaries
- Coordinating insurance proceeds with other estate assets
Your estate plan may include property, investments or business interests. Because of that, a trust structure may align with certain planning goals while another approach may fit different situations.
Administration of an irrevocable life insurance trust after death
After death, the insurance company may pay the policy benefit to the trust. The trustee then carries out the instructions written in the trust document. Those instructions may address timing, conditions or distribution methods for beneficiaries.
In New Jersey, life insurance paid to a named beneficiary often does not trigger inheritance tax. However, proceeds paid to an estate may fall under inheritance tax rules depending on who receives the property. Because of this, a trust structure may help organize distribution and keep proceeds separate from other estate assets.
Considerations when evaluating an ILIT in estate planning
If you hold a high-value life insurance policy, you may want to review who owns the policy and where it sits in your estate plan. In some cases, you may explore an irrevocable life insurance trust as part of that review. This type of trust may change policy ownership and set instructions for future distributions. Looking at these details together may help you decide whether this structure fits within your estate planning approach.