What is an Irrevocable Life Insurance Trust?

An Irrevocable Life Insurance Trust (ILIT) is, as the name suggests, an irrevocable trust that, once created, generally cannot be changed or rescinded. An ILIT allows an insurance policy to be held in a trust so that the policy proceeds will not be included in the settlor’s taxable estate. In order for the settlor to receive the full tax advantages offered by an ILIT, he cannot name himself or his spouse as the trustee. An individual may contribute monies annually to the ILIT to pay the premiums on the life insurance policy held in the trust and, depending on the amount of those contributions, they may be made tax-free. Upon the death of the settlor, or the settlor and spouse, the life insurance policy’s proceeds are paid to the trust. The trustee then distributes that money to the beneficiaries as outlined by the terms of the trust.

The use of any trust for estate planning purposes ultimately will depend on a variety of factors, including the size and complexity of the estate, the need to avoid taxes, and the settlor’s desire to distribute assets outright or in trust. In cases where it is desirable to keep the proceeds from a life insurance policy outside the taxable estate, the use of an ILIT may be appropriate.