Irrevocable Life Insurance Trusts
There are many reasons to own life insurance—as a means to pay off a mortgage, to provide for children’s education, to replace income used to support loved ones, or even to pay for one’s own funeral expenses. But life insurance can also be a powerful estate planning tool, especially when owned by an irrevocable life insurance trust (ILIT).
What Is an ILIT?
An ILIT is a type of trust specifically created to own and manage life insurance purchased to insure the creator of the trust (e.g., you or your spouse). As the creator of the trust, you make gifts to the trust on behalf of the ILIT’s beneficiaries. The ILIT trustee uses those gifts to purchase a life insurance policy for which you are the insured, and the ILIT is the owner and beneficiary of the policy. Because the trust is irrevocable, policy proceeds that are payable upon your death are not included in your taxable estate. In addition, any gifts you make to the ILIT during your lifetime are removed from the list of taxable assets included in your estate
You should consider the successor trustee’s responsibilities carefully prior to accepting the role. If you have any reservations, it is best to decline the position. Keep in mind that any change in trustee should be documented in writing.
At your death, the income and estate tax-free proceeds paid by the life insurance policy are collected by the trustee and held by the ILIT. The proceeds are then distributed to the ILIT’s beneficiaries, per the provisions of the trust.
Estate Planning Benefits
An ILIT can provide the following estate planning benefits:
- Gifts to the ILIT reduce the taxable estate.
- An income and estate tax-free death benefit maximizes the amount that beneficiaries receive.
- Beneficiaries can use ILIT funds to pay the costs associated with settling your estate.
- ILIT funds can meet liquidity needs associated with illiquid assets owned in the estate.
- Probate may be avoided.
Other Considerations
Although an ILIT can be a significant enhancement to any estate plan, the strategy may not be appropriate for everyone. If you are uninsurable or if the cost of insurance is too high, an ILIT may be too expensive or impossible to implement. Before implementing an ILIT, consult with a qualified estate planning attorney to be sure that you have enacted an estate plan that takes advantage of the federal and state estate tax exemptions available to you.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
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