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Estate planning is an important step in organizing your assets for future generations. Perhaps you hope to pass down the family business or leave enough money to help pay for your grandchildren’s college tuition. To meet your estate planning goals, you must carefully consider the effect of uncertainties, such as estate tax implications and the possibility that your own financial needs may change over time.

For instance, a serious hospital bill could force you to tap into the assets you’ve put aside, while a divorce or shift in familial relationships could prompt you to change your list of beneficiaries or the specifics of the asset distribution. It’s wise to incorporate flexibility into your plan up front to protect your estate and have access to your money when you need it.

Tax protection

Life insurance’s primary purpose is to provide protection against the premature death of the insured. However, life insurance policies can be useful in other situations as well. High net-worth married couples who are concerned with estate taxes may want to consider creating an irrevocable life insurance trust (ILIT) that allows the trustee of the ILIT to buy and hold a life insurance policy in the trust. An ILIT offers several benefits: The policy may be able to be funded with lifetime gifts¹, a tax-free annual gift,² and, if the ILIT is properly drafted, the value of the policy should be excluded from your total taxable estate. The trustee of the ILIT may also be able to use the tax-free death benefit³ to pay taxes and other estate settlement costs.

An ILIT enables a grantor-spouse to name specific beneficiaries. Depending on the terms of the ILIT, the beneficiaries may be able to receive distributions of the death benefit proceeds at the insured(s) death.

Options for added flexibility

Married couples seeking more versatility than the traditional ILIT provides may want to consider incorporating a flexible ILIT into their estate plan. In a flexible ILIT, one spouse is the grantor of the trust and the other is the beneficiary. Under the flexible ILIT’s terms, the trustee (a friend, advisor or extended family member) may be given the discretion to make distributions to the spousal beneficiary for any reason—even to the exclusion of other beneficiaries. This rule potentially provides an avenue for the trust to unwind and return the assets to the couple’s estate, if the trust is no longer needed for estate planning purposes.

If the grantor spouse has concerns about losing indirect access to the trust in the event of a divorce or the death of the spousal beneficiary, additional flexibility can be incorporated in two ways. Because the trust allows adaptable language such as “my current spouse” to name the beneficiary, the assets can be held without distribution until the grantor remarries. A flexible ILIT may also allow the trustee to make loans to the grantor spouse, which may entail the trustee accessing the policy’s available cash value if necessary⁴. This feature can be helpful if the spousal beneficiary should pass first.

A solution for an uncertain world

Whether you’re looking for added protection from estate tax liability or being proactive in preparing for life’s unforeseen circumstances, it’s smart to build flexibility into your estate plan. Using flexible ILITs as part of a comprehensive estate plan allows you to remain in greater control of your assets, helping you ensure the best possible outcome for you and your loved ones.