Why Using LegalZoom for Your ILIT Is a Ridiculous—and Risky—Idea
In today’s fast-paced world, more people are turning to online services to handle important legal matters. Whether it’s creating a will, forming a business, or establishing a trust, sites like LegalZoom promise to make the process easy and cheap. But when it comes to an Irrevocable Life Insurance Trust (ILIT), using a one-size-fits-all online platform isn’t just a bad idea—it’s outright ridiculous.
An ILIT is one of the most complex and powerful estate planning tools available, and if it’s not done correctly, the consequences can be financially disastrous. So, if you’re considering using LegalZoom (or any other online service) to create your ILIT, here’s why you need to think twice—and then run the other way.
What Is an ILIT and Why It Matters?
An Irrevocable Life Insurance Trust (ILIT) is a specialized type of trust that holds a life insurance policy outside of your estate. The main reason to create one is to shield the proceeds of the life insurance from estate taxes and creditors, ensuring that the full value of the policy goes to your beneficiaries.
But here’s the catch: An ILIT must be set up and managed perfectly to achieve these goals. A small mistake in the wording or execution could mean that the trust fails to do its job, leading to massive tax liabilities for your heirs.
This is not a document you should trust to a fill-in-the-blank, cookie-cutter website.
The Problem with LegalZoom and Online Trust Services
Online legal services are designed to be cheap and quick, but that’s because they’re made for mass use. They give you a template, let you fill in your information, and spit out a document that seems official. Here’s why that approach simply doesn’t work for something as complex as an ILIT:
1. No Customization for Your Unique Situation: ILITs are not one-size-fits-all. A cookie-cutter form can’t possibly take into account the nuances of your financial situation, family dynamics, or long-term planning goals. What if you have specific needs, like protecting a special-needs child, dealing with multiple marriages, or ensuring your business interests are taken care of? LegalZoom isn’t going to ask you those questions.
2. Tax Consequences Are Too High to Risk: The whole point of an ILIT is to avoid estate taxes, but if the trust isn’t set up correctly, the IRS could pull those life insurance proceeds right back into your taxable estate. That could result in 40% or more in taxes that your heirs will have to pay. Are you really willing to trust a $50 form with potentially millions of dollars on the line?
3. No Legal Advice Means You’re on Your Own: With a service like LegalZoom, you’re not getting an attorney—you’re getting a set of instructions that you’re expected to follow yourself. If you mess up even a single step, the trust may not work as intended. And let’s be real—most people don’t have the knowledge to navigate these steps without professional guidance.
4. Managing an ILIT Requires Expertise: Setting up an ILIT is just the beginning. Once the trust is in place, it requires careful management to remain valid. For example, you have to follow specific gifting rules to pay the insurance premiums without triggering gift taxes. An online service won’t provide you with the ongoing support you need to make sure you’re following these rules.
Common Mistakes That LegalZoom Won’t Catch
When you use a DIY service like LegalZoom, you’re opening yourself up to all kinds of mistakes. Here are just a few of the big ones:
- Naming the wrong trustee: If your trustee isn’t independent or is improperly selected, it could compromise the whole trust. LegalZoom doesn’t know your family dynamic and won’t help you pick the right person.
- Failing to follow Crummey notice requirements: To take advantage of tax-free gifts, you need to send specific notices to your beneficiaries each year. Miss this step, and the IRS could impose gift taxes. You think LegalZoom will remind you of that? Think again.
- Improper funding of the trust: Transferring a life insurance policy to an ILIT isn’t as simple as it sounds. The timing, method of transfer, and even the ownership of the policy all matter. A misstep could blow up your entire tax plan.
Why You Need a Professional for Your ILIT
The truth is, creating an ILIT is too important—and too complicated—to leave in the hands of a DIY service. A qualified estate planning attorney understands the intricacies of trust law, tax law, and financial planning. They’ll take the time to understand your specific situation, help you avoid costly mistakes, and ensure that your trust works exactly as it’s supposed to.
Here at Monteforte Law, we specialize in estate planning and high-level strategies like ILITs. We don’t offer generic, one-size-fits-all documents. Instead, we sit down with you, listen to your needs, and design a personalized plan that will protect your assets and your family for generations to come.
If you’re considering an ILIT or any other estate planning tool, the smartest move you can make is to speak with an experienced attorney. Don’t risk your family’s financial future on a cheap online service that can’t deliver the custom solutions you need.
We invite you to learn more about ILITs and other powerful estate planning tools by attending one of our free seminars. At the seminar, we’ll explain how estate planning can protect your assets and ensure your loved ones are taken care of. Plus, if you book a session before leaving the seminar, you’ll receive $500 off your estate plan.
You Deserve More Than a DIY Solution
Your life and your family are far too important for a one-size-fits-all solution like LegalZoom. An ILIT is a powerful tool, but only when it’s done right. Don’t risk costly mistakes—get the personalized, professional help you need.
Book your spot at our seminar today, and let us show you how estate planning, done the right way, can change everything.