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Life insurance can be a useful, tax-efficient tool for ensuring the transfer of wealth and assets across generations – but finding the right structure to support your estate planning goals is crucial. As you begin your estate planning process, an irrevocable life insurance trust (ILIT) can provide a host of tax and non-tax advantages, as well as greater control over a life insurance policy that a last will and testament may not provide.

What is an ILIT?

An ILIT is a trust created to own and control one or more life insurance policies while the insured is still alive. The trust is irrevocable, meaning it cannot be altered or rescinded once it is created. By moving your life insurance policies into the control of a trust, the ILIT becomes the owner and beneficiary of the policies, allowing for several potential benefits once insurance proceeds are paid out.

Benefits of ILITs

Liquidity for estate taxes and other expenses

ILITs provide liquidity, outside of the grantor’s taxable estate, for the payment of estate taxes, debts, and expenses of administration. While the federal estate tax exemption for individuals in 2022 is $12,060,000 (IRS)1, this exemption will be reduced to $5M (indexed for inflation) in 2026 under current law. In addition, several states impose a state level estate tax or inheritance tax.

Preserve an inheritance

The generation-skipping transfer (GST) tax applies a 40% tax on the transfer (during life or at death) of property valued at more than $12,060,000 to individuals who are more than one generation removed from the donor (IRS )2. An ILIT can also be structured to be GST-exempt for future generations.

Leverage annual gift tax exclusion

In 2022, individuals have the ability to give an annual gift of $16,000 to another individual each year without incurring any gift taxes (IRS)3. By creating an appropriately structured ILIT, grantors can make annual exclusion gifts of $16,000 to each beneficiary of the trust.

Protect your assets

An ILIT provides protection from the creditors of the grantor or beneficiaries, as well as protection from ex-spouses or in a bankruptcy situation. The trustee of an ILIT can also have the discretionary power to control how insurance proceeds are paid out, which can help a beneficiary avoid irresponsible spending.

For more information about trusts, contact your Key Private Bank Advisor

The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank National Association (KeyBank), Member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC (KIS), member FINRA/SIPC and SEC-registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Inc. (KIA). KIS and KIA are affiliated with KeyBank.

Investment products are:

NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions.