A life insurance policy is a powerful way to provide for your family. However, without proper planning, it could also increase the size of your taxable estate, potentially leaving your loved ones with a tax bill or facing legal delays. An Irrevocable Life Insurance Trust (ILIT) can help prevent this.

At The Law Office of Carey Thompson, PC, we work with individuals and families in El Paso to build thoughtful estate plans that offer lasting protection. One of the tools we often recommend for high-value insurance policies is an ILIT. Contact us today to consult with an experienced estate planning attorney.

What Is an Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust is a legal arrangement that owns your life insurance policy outside of your estate. Once the trust is created and funded, it generally cannot be altered or revoked. This limitation offers a significant benefit: the life insurance payout won’t be taxed as part of your estate.

You appoint a trustee to manage the policy and carry out your instructions. After your death, the trustee distributes the insurance proceeds to your named beneficiaries according to your wishes, without the delays or public process of probate.

Why Consider an ILIT?

An ILIT can serve multiple purposes, especially for those with significant policies or long-term planning goals:

  • Minimize estate taxes: By removing the policy from your estate, you may reduce or eliminate federal and state estate tax liability.
  • Avoid probate: Proceeds held in an ILIT are distributed directly, without the need for court involvement.
  • Preserve government benefits: Carefully structured trusts can help keep beneficiaries eligible for programs like Medicaid or SSI.
  • Control the distribution: You set the rules—funds can be released over time or restricted for specific purposes, such as education or medical care.

This type of trust provides both peace of mind and financial efficiency for families seeking to protect their wealth and minimize administrative burdens.

How ILITs Work

The process of setting up and maintaining an ILIT involves a few key steps:

  1. Establish the trust. You’ll work with an estate planning attorney to create the ILIT and name a trustee—someone other than yourself.
  2. Fund the trust. The trust either purchases a new policy or takes ownership of an existing one.
  3. Pay premiums. You make annual gifts to the trust so it can pay the policy premiums. This may involve sending notices to beneficiaries to comply with IRS gift rules.
  4. Distribute funds. Upon your passing, the insurance payout is deposited into the trust. The trustee then distributes the money based on your instructions.

By removing legal ownership of the policy from your estate, an ILIT helps ensure that the funds are used as intended, while also protecting you from taxes and delays.

Who Should Consider an ILIT?

An ILIT isn’t for everyone, but it can be a wise choice if:

  • Your life insurance policy has a high value that could push your estate above tax thresholds.
  • You want to provide structure or oversight for young, disabled, or financially inexperienced beneficiaries.
  • You’re concerned about preserving public benefit eligibility for a spouse or child.
  • You’re interested in passing on wealth with as little tax exposure as possible.

At The Law Office of Carey Thompson, we help you examine your complete financial picture before recommending whether an ILIT is a suitable fit for your needs. Every estate plan we create is tailored to the person behind it.

What to Know Before You Start

ILITs offer substantial benefits, but they must be carefully created and managed. Here are a few things to keep in mind:

  • They’re irrevocable. Once you’ve created the trust and transferred ownership of the policy, you typically cannot change your mind.
  • Gifting rules apply. Annual premium contributions may count as gifts, but we can help structure them to stay within federal limits.
  • Timing matters. If you transfer an existing policy to the ILIT and pass away within three years, the IRS may still include the policy in your estate.

That’s why it’s essential to set up an ILIT early and correctly, with help from a qualified estate planning attorney who understands the rules.

Talk to an El Paso Estate Planning Attorney Today!

If you want more control over how your life insurance benefits are used—or are looking for a tax-efficient way to pass on wealth—an Irrevocable Life Insurance Trust may be the right fit for your plan.

At The Law Office of Carey Thompson, we help families throughout El Paso create estate plans that protect what matters most to them. Whether you’re updating an existing plan or starting fresh, we’ll guide you through every option and help you build a trust that works for your life and your legacy. Call us today to start planning for the future with confidence.