If you have decided to create an Irrevocable Life Insurance Trust, or ILIT for short, to hold and own your life insurance policies, then once the trust agreement has been signed you will need to fund the trust with your policies. Here are the steps necessary to fund existing insurance policies or new insurance policies into your ILIT.
How to Fund Existing Policies into an Irrevocable Life Insurance Trust
Ideally when you decide to establish an ILIT, you will be able to purchase a brand new insurance policy. Why? Because for the ILIT to effective in removing an existing life insurance policy from your taxable estate, you will need to live for three years from the date that the existing policy is transfered into the ILIT. On the other hand, a new policy purchased directly by the Trustee of the ILIT does not have any "look back" period at all - upon the purchase of the new policy by the Trustee of the ILIT, the proceeds will immediately be excluded from your taxable estate.
If you are not able to purchase a new policy and will be transferring one or more existing policies into your ILIT, then here is what you will need to do to get the policies into the ILIT:
- Obtain an Employer Identification Number (EIN) for the ILIT - This can be done online at the IRS website.
- Obtain a Change of Owner/Assignment form - Your insurance agent, financial advisor, or estate planning attorney should be able to assist you with getting the correct form. Note that many insurance companies post all of the required forms online.
- Obtain a Change of Beneficiary form - Your insurance agent, financial advisor, or estate planning attorney should be able to assist you with getting the correct form. Note that some companies combine the Change of Owner/Assignment form and Change of Beneficiary form into one document.
- Complete all required forms - Usually the form(s) will need to be signed by the current owner and the Trustee of the ILIT as the new owner.
- Forward all required forms to the insurance company.
- Follow up and confirm that the requested changes have been made to your policy - Be sure to store the confirmation documents with your ILIT.
How to Fund New Policies into an Irrevocable Life Insurance Trust
If you are purchasing a new life insurance policy, then ideally the Trustee of your ILIT will sign the original application for the new policy. If as often happens the ILIT is not in existence at the time the new policy is applied for, then you will need to quickly establish the ILIT and request that the Trustee of the ILIT be substituted as the owner of the new policy prior to it being issued. In addition, the ILIT needs to be initially named or substituted as the primary beneficiary on the application.
But beware, if the new insurance policy is issued before the ILIT is in place, then unfortunately you missed the opportunity to avoid the three year look back period and will have to follow the procedures listed above for funding existing life insurance policies into an ILIT.