What is an Irrevocable Life Insurance Trust?

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An Irrevocable Life Insurance Trust (“ILIT”) is probably the most frequently used type of irrevocable trust. It’s an irrevocable trust that you can establish to own a life insurance policy on your life. If you personally own a life insurance policy, the policy proceeds will be includable in your taxable estate and subject to estate tax at your death. However, if someone other than you owns the policy, the policy proceeds will be excluded from your taxable estate.

For federal death tax purposes, you are treated as the owner of a life insurance policy if you have any “Incidents of Ownership” in the policy. Incidents of Ownership include, among other rights, the right to borrow the cash value, surrender the policy, or change the beneficiaries of the policy. If an ILIT is created to own a policy on your life, the ILIT, not you will possess all incidents of ownership. Therefore, the death benefits will not be includable in your estate. The ILIT is usually also named as the beneficiary of the death proceeds at your death, and you can provide distribution guidelines and asset protection for the policy proceeds.

Life insurance policies may be subject to substantial fees and charges. Guarantees are subject to the claims paying ability of the insurer. Loans will reduce the policy’s death benefit and cash surrender value, and will have tax consequences if the policy lapses.