Why Would Someone Want to Undo an ILIT?

While ILITs can be highly effective, life circumstances change. Some common reasons for reconsidering an ILIT include:

  • Change in estate tax exposure: Your estate may no longer be large enough to warrant tax planning through an ILIT.

  • Family changes: Divorce, remarriage, or changing relationships with trustees or beneficiaries.

  • Insurance no longer needed: The insured may no longer want to pay premiums or maintain the policy.

  • Administrative burden: Managing an ILIT can be time-consuming and costly over time.

Can an ILIT Be Undone?

The answer is: sometimes, but it depends on several factors.

1. Decanting the Trust

In some states, trustees may be allowed to “decant” an irrevocable trust, meaning they can move assets from the ILIT into a new trust with more favorable or flexible terms. This does not completely undo the trust but can help restructure it.

2. Termination by Agreement

If all parties involved, the trustee and all beneficiaries agree, and if allowed under state law, it may be possible to terminate the ILIT early. However, this may have tax consequences and requires careful legal review.

3. Judicial Modification

In certain cases, you can petition the court to modify or terminate the trust if the purpose of the ILIT has become impossible, illegal, or substantially impaired.

4. Surrendering or Selling the Policy

One practical route is for the ILIT to surrender or sell the life insurance policy. This doesn’t dissolve the trust itself but can render it functionally inactive.

Important Considerations

  • Gift and estate tax implications: Unwinding an ILIT improperly could expose the life insurance proceeds to estate taxes.

  • Generation-skipping transfer (GST) tax: ILITs often include GST planning that could be disrupted by modification.

  • Fiduciary duties: Trustees must act in the best interest of the beneficiaries, and any changes must align with those obligations.

Next Steps

If you’re considering modifying or terminating your ILIT, it’s crucial to work with an experienced estate planning attorney, such as the Davis Schilken, PC team. These decisions have long-term implications, and each situation must be evaluated individually based on trust language, state law, and your personal goals.

At Davis Schilken, PC, we help clients thoughtfully review their estate plans and adjust as life changes. If you think your ILIT may no longer be serving you or your family effectively, we’re here to help explore your options.

Contact us today to schedule a no obligation consultation.
Let’s ensure your estate plan continues to reflect your wishes and supports your legacy. Call our office today (303)670-9855. We make estate planning simple.

Archives

Categories

Meta