Can the Irrevocable Life Insurance Trust Last ForeverShare this post
Depending upon state law, a life insurance trust can last as long as any other trust, including dynasty trusts. If the ILIT is a dynasty-type ILIT, it will be subject to generation-skipping transfer taxes as discussed in Chapter 4. However, your generation skipping transfer tax exemption can be applied against the amount contributed to the ILIT, not against the death proceeds of the insurance policy purchased by the ILIT. The ability to purchase life insurance inside of a dynasty ILIT provides significant leverage for the use of the generation skipping transfer tax exemption.
People buy life insurance for many reasons, and it offers some unique features that are not found in many other financial products. For example, leverage, especially in the early years of a policy, where you pay a small premium to lock in a large death benefit or the ability to time liquidity to an event (the death benefit).
- An irrevocable life insurance trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive.
- ILITs are also used to manage and distribute the proceeds that are paid out upon the insured’s death.
- The parties in an ILIT are the grantor, trustees, and beneficiaries.
- An ILIT can be used to minimize estate taxes, avoid gift taxes, protect government benefits, protect assets, for distribution control, legacy planning, and various tax considerations.
What Is an Irrevocable Life Insurance Trust (ILIT)?
An irrevocable life insurance trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive, as well as to manage and distribute the proceeds that are paid out upon the insured’s death. An ILIT can own both individual and second to die life insurance policies. Second to die policies insure two lives and pay a death benefit only upon the second death.
An ILIT has several parties: the grantor, trustees, and beneficiaries. The grantor typically creates and funds the ILIT. Gifts or transfers made to the ILIT are permanent, and the grantor is giving up control to the trustee. The trustee manages the ILIT, and the beneficiaries receive distributions.
It is important for the grantor to avoid any incident ownership in the life insurance policy, and any premium paid should come from a checking account owned by the ILIT.