<\/p>\n
Life insurance can provide peace of mind. But if your estate is large enough that estate taxes are a concern, it\u2019s important not to own the policy at death. Why? The policy\u2019s proceeds will be included in your taxable estate. To avoid this result, a common estate planning strategy is to set up an irrevocable life insurance trust (ILIT) to hold the policy.<\/p>\n
However, there may come a time when you no longer need the ILIT. Does its irrevocable nature mean you\u2019re stuck with it forever? Maybe not. Depending on the ILIT\u2019s terms and applicable state law, you might have the option of pulling a life insurance policy out of an ILIT or even unwinding the ILIT entirely.<\/p>\n
How does an ILIT work?<\/strong><\/p>\n An ILIT shields life insurance proceeds from estate tax because the trust, rather than the insured, owns the policy. (Note, however, that under the \u201cthree-year rule,\u201d if you transfer an existing policy to an ILIT and then die within three years, the proceeds remain taxable. That\u2019s why it\u2019s preferable to have the ILIT purchase a new policy, if possible, rather than transferring an existing policy to the trust.)<\/p>\n The key to removing the policy from your taxable estate is to relinquish all \u201cincidents of ownership.\u201d This means, for example, that you can\u2019t retain the power to change beneficiaries; assign, surrender or cancel the policy; borrow against the policy\u2019s cash value; or pledge the policy as security for a loan (though the trustee may have the power to do these things).<\/p>\n What are the options for undoing an ILIT?<\/strong><\/p>\n Generally, there are two reasons you might want to undo an ILIT:<\/p>\n Although your ability to undo an ILIT depends on the ILIT\u2019s terms and applicable state law, potential options include:<\/p>\n Allowing the insurance to lapse.<\/strong> This may be a viable option if the ILIT holds a term life insurance policy that you no longer need (and no other assets). You simply stop making contributions to the trust to cover premium payments. Technically, the ILIT continues to exist. But once the policy lapses, the ILIT owns no assets. It\u2019s also possible to allow a permanent life insurance policy to lapse, but other options may be preferable \u2014 especially if the policy has a significant cash value.<\/p>\n Swapping the policy for cash or other assets.<\/strong> Many ILITs permit the grantor to retrieve a policy from an ILIT by substituting cash or other assets of equivalent value. If you have illiquid assets but need cash, you may be able to gain access to a policy\u2019s cash value by swapping the policy for illiquid assets of equivalent value.<\/p>\n Surrendering or selling the policy.<\/strong> If your ILIT holds a permanent insurance policy, the trust might surrender it, which will preserve its cash value but avoid the need to continue paying premiums. Alternatively, if you\u2019re eligible, the trust could sell the policy in a life settlement transaction.<\/p>\n Distributing the trust assets.<\/strong> Some ILITs give the trustee the discretion to distribute trust funds (including the policy\u2019s cash value, other trust assets or possibly the policy itself) to your beneficiaries, such as your spouse or children. Typically, these distributions are limited to funds needed for \u201chealth, education, maintenance and support.\u201d<\/p>\n Going to court.<\/strong> If the ILIT\u2019s terms don\u2019t permit the trustee to unwind the trust, it may be possible to obtain a court order to terminate it. For example, state law may permit a court to modify or terminate an ILIT if unanticipated circumstances require changes to achieve the trust\u2019s purposes or if the grantor and all beneficiaries consent.<\/p>\n We\u2019re here to help<\/strong><\/p>\n These are some, but by no means all, of the strategies that may be available to unwind an ILIT. Bear in mind that some of these solutions can have tax implications for you or your beneficiaries. Contact us to learn more about ILITs.<\/p>\n \u00a9 2026<\/em><\/p>\n <\/body> Life insurance can provide peace of mind. But if your estate is large enough that estate taxes are a concern, it\u2019s important not to own the policy at death. Why? The policy\u2019s proceeds will be included in your taxable estate. To avoid this result, a common estate planning strategy is to set up an irrevocable […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,59,10],"tags":[8,11,12],"class_list":["post-17521","post","type-post","status-publish","format-standard","hentry","category-articles","category-etra","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17521","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=17521"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17521\/revisions"}],"predecessor-version":[{"id":17522,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17521\/revisions\/17522"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=17521"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=17521"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=17521"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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