An irrevocable life insurance trust, or ILIT, is a tool that owns a life insurance policy outside your taxable estate. For some Boca Raton families it is essential, and for others it is overkill. The mistakes happen when people set one up for the wrong reason or run it incorrectly. Here is what to avoid.
First, Understand What an ILIT Is
An ILIT is an irrevocable trust (governed in part by Florida’s trust code, Ch. 736) that owns your life insurance policy. Because the trust, not you, owns and controls the policy, the death benefit can pass outside your estate and to your beneficiaries free of probate, under terms you set. Once created, you generally cannot amend or revoke it, which is exactly the feature that makes it work and the feature people underestimate.
Mistake 1: Assuming You Need One for Florida Estate Tax
Florida has no state estate or inheritance tax. So a Boca Raton ILIT is rarely about state death taxes. The classic reason is the federal estate tax, which only affects estates above a high exemption threshold. If your total estate, including life insurance, is well under the federal limit, the tax rationale for an ILIT may not apply at all. Setting one up anyway adds cost and rigidity for no benefit.
Mistake 2: Ignoring the Non-Tax Reasons
Even without an estate tax problem, an ILIT can be valuable. It can provide professional management for beneficiaries who are minors or not ready to handle a large lump sum, protect proceeds from a beneficiary’s creditors or divorce, and coordinate liquidity for a family business or a blended family. For Boca Raton families with second marriages or children from prior relationships, control over how and when proceeds are paid is often the real driver.
Mistake 3: Keeping Too Much Control
If you retain “incidents of ownership” over the policy, the death benefit can be pulled back into your taxable estate, defeating the purpose. You generally cannot serve as your own trustee in the usual sense, change beneficiaries, or borrow against the policy. Choosing an independent, trustworthy trustee is critical.
Mistake 4: Botching the Premium Gifts
Premiums are typically funded by gifts to the trust. To keep those gifts within the annual gift tax exclusion, ILITs often use “Crummey” notices that give beneficiaries a temporary right to withdraw. Skip the notices and you can lose the exclusion. This administrative discipline trips up many do-it-yourself trustees.
Mistake 5: Transferring an Existing Policy Carelessly
Moving a policy you already own into an ILIT can trigger a three-year lookback, meaning if you die within three years the proceeds may still be taxed in your estate. Sometimes it is cleaner for the trust to buy a new policy. This is a decision to make with professional guidance, not a form to fill out.
Consult a Florida Attorney
An ILIT is irrevocable, so getting it right the first time matters. Before creating or funding one, have a Florida-licensed estate planning attorney serving Boca Raton confirm an ILIT fits your goals and is administered correctly.
For more on our Florida practice, see our overview of powers of attorney in Florida. Morgan Legal Group's affiliated New York office also handles special needs planning in New York.
