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When you want to protect assets and plan ahead for your family, an irrevocable life insurance trust can be a strong tool. An ILIT removes life insurance proceeds from your taxable estate, helps shield funds from creditors, and gives you more control over how and when beneficiaries receive money. New Jersey families who are planning for the year ahead often use these trusts to reduce tax exposure and support a smoother transfer of wealth.
What Is an Irrevocable Life Insurance Trust?
An irrevocable life insurance trust is a legal arrangement that owns your life insurance policy. Once the trust is created, you cannot change its terms or reclaim the assets you transfer into it. Despite this limited flexibility, an ILIT provides a level of structure that helps families plan long-term.
When you place the policy inside the trust, the death benefit is paid to the trust rather than to your estate. This separation is what drives many of the tax and asset-protection advantages.
How ILITs Can Reduce Estate Taxes
New Jersey does not currently impose a state estate tax, but many residents still face federal estate tax exposure. An ILIT can help reduce or avoid this outcome because the life insurance proceeds are not counted as part of your taxable estate.
Here is how the tax benefit works:
- The trust becomes the owner and beneficiary of the life insurance policy.
- The death benefit passes directly to the trust, not to you.
- Because the proceeds bypass your estate, they are not included in federal estate tax calculations.
Families with large insurance policies often use ILITs to avoid unexpected tax burdens that may reduce what beneficiaries receive.
Protecting Beneficiaries and Managing How Funds Are Distributed
One of the key strengths of an ILIT is the ability to control how beneficiaries receive money. You can structure the trust to distribute funds gradually, hold assets until a child reaches a certain age, or limit access for beneficiaries who need financial guidance.
A well-drafted ILIT can also help protect trust assets from:
- Creditors
- Lawsuits
- Divorce disputes
This level of protection supports long-term financial stability for future generations.
Supporting a Smoother Transfer of Wealth
We often speak with families who want their estate plan to run smoothly without delays or confusion for their loved ones. Because an ILIT avoids probate and reduces administrative steps, the trustee can release funds more quickly than in a traditional estate transfer.
Common advantages include:
- Faster access to funds for funeral costs or immediate needs
- Reduced risk of disputes
- A clear set of instructions for the trustee
This can make a noticeable difference during a stressful time.
Key Considerations Before Creating an ILIT
While an ILIT offers strong tax and asset-protection benefits, there are several points to consider before moving forward.
1. Loss of control
Once you create the trust and transfer the policy, you cannot revoke or edit the terms. This requires confidence in your long-term plan.
2. Timing of transfers
If you transfer an existing policy to an ILIT and pass away within three years, the death benefit may still be included in your taxable estate. Many families choose to have the trust purchase a new policy instead.
3. Annual gift tax rules
If you fund the annual insurance premium through gifts to the trust, you must follow certain steps to keep those gifts tax-efficient. One of those steps may include sending beneficiaries a “Crummey notice” informing them that they have the right to withdraw the gift for a short period of time.
We help clients evaluate these factors to determine whether an ILIT aligns with their goals for the coming year.
When an ILIT May Be Right for Your New Jersey Estate Plan
You may want to consider an irrevocable life insurance trust if you:
- Own a large life insurance policy
- Want to lower future estate tax exposure
- Hope to limit financial risk for younger beneficiaries
- Prefer a structured transfer of wealth rather than a lump sum payout
We also see ILITs used frequently by blended families or families with business interests who want clearer control over how assets are divided.
Take the Next Step Toward a Stronger Estate Plan
If you are considering an irrevocable life insurance trust as part of your New Jersey estate plan, we can help you review options, reduce tax exposure, and protect the people who matter most. Contact Bozanian McGregor, LLC to start planning for the year ahead.
FAQ: Irrevocable Life Insurance Trusts in New Jersey
Can I change the beneficiaries of my ILIT after it is created?
Usually, no. Because an ILIT is irrevocable, you cannot freely change beneficiaries once the trust is established. However, some ILITs allow limited adjustments through specific trust provisions.
Who serves as trustee of an ILIT?
Most clients choose a trusted family member or a professional fiduciary, but not the person whose life is insured.
Can an ILIT hold assets other than life insurance?
In most cases, it is structured specifically to hold a life insurance policy, although related cash contributions may be added for premium payments.