Estate Planning

What Is an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust (ILIT) is a trust that owns someone’s life insurance policy and pays the premiums. The trustor creates the trust by transferring his/her life insurance policy into the trust, thereby eliminating his/her name from the insurance policy. The trustor then makes gifts of money to the trust so that the trust can pay the premiums. When the trustor dies, the proceeds of his/her life insurance policy (the death benefit) will go to the beneficiaries of the trust, generally the trustor’s surviving spouse and children.

Why Do I Need An Irrevocable Life Insurance Trust?

If you have any incidence of ownership over your life insurance policy (such as the right to change beneficiaries or the right to borrow on the policy) when you die, its proceeds will be included in your gross estate and therefore subject to estate taxes. You can avoid the inclusion of your life insurance policy by transferring the policy into an irrevocable life insurance trust. A properly established and administered irrevocable life insurance trust will allow the policy’s proceeds to pass to the beneficiaries without that amount being taxed in the insured’s estate. Also, your heirs will be able to use the proceeds of the policy to pay off estate taxes so that a family business or other property does not have to be sold in order to pay estate taxes.