Trusts and Estates: Irrevocable Life Insurance Trust

An irrevocable life insurance trust (ILIT) may be a valuable part of a comprehensive estate plan. An ILIT may:

• remove insurance proceeds from the estate of the insured for tax purposes;
• make insurance proceeds available for a surviving spouse in a way that excludes or limits the trust assets from the spouse's estate for tax purposes;
• provide liquidity for taxes and administration expenses;
• provide creditor protection for beneficiaries;
• leverage the generation-skipping transfer tax exemption to provide benefits for multiple generations without transfer taxation; and
• achieve these goals with minimal or no gift tax cost.

To establish an ILIT, an insured (1) executes a trust agreement and (2) transfers all rights and incidents of ownership in a life insurance policy to a named trustee, or transfers cash to the trustee, who then purchases a policy. The trustee becomes the owner and beneficiary of any life insurance policies in the trust. The insured then transfers cash annually to the trustee to pay premiums on the policies.

If the insured transfers a life insurance policy to the trustee and dies during the three years following the transfer, the proceeds will be included in the insured's estate for tax purposes. Alternatively, if the trustee purchases a policy or if the insured survives the three year transfer period, proceeds will be excluded from the estate for tax purposes.

If you are considering an ILIT, we recommend that you contact a lawyer in our Wealth Management Practice to discuss your particular situation.