A:

The irrevocable life insurance trust or "ILIT" is a trust that cannot be rescinded, amended or modified in any way after its creation. Once the grantor contributes property or life insurance death benefits to the trust, he or she cannot change the terms of the trust or reclaim any property left to the trust.

There are three good reasons to utilize an ILIT. The first is for estate tax considerations, the second is for concern of leaving a large sum of money unsupervised to a minor or an irresponsible adult, and lastly for asset protection concerns.

If an ILIT is properly structured, the death benefits paid to the trust will be free from inclusion in the gross estate of the insured. This is different from when life insurance death benefits are paid to an individual, as the proceeds are included in the taxable estate of the decedent.

If the insured has beneficiaries that are minors or adults (maybe those that have had issues in the past, such as alcohol or drug abuse, problems handling their finances, etc.), it might be a good idea to set up an ILIT with the trust as beneficiary. This appoints a trustee to act as a supervisor for the trust and distribute the assets per the terms of the trust documents as per the grantor's wishes.

The ILIT will also provide a level of asset protection for the beneficiaries should they possibly be in current litigation or experience the potential of a future lawsuit against them. ILITs are not considered to be owned by the beneficiaries, which in turn makes them extremely difficult for courts to attach as assets of the beneficiary, thus making them next to impossible for creditors to access.

Learn how to read one of the most important documents you own, Understand Your Insurance Contract.

This question was answered by Steven Merkel.

RELATED FAQS
  1. Can trust funds be activated before the grantor intended?

    Trust law gives the grantor specific rights over the release of assets and therefore it is not possible to change the stipulations ... Read Answer >>
Related Articles
  1. Retirement

    7 Reasons To Own Life Insurance in an Irrevocable Trust

    An Irrevocable Life Insurance Trust helps minimize estate and gift taxes, provides creditor protection and protects government benefits.
  2. Managing Wealth

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  3. Managing Wealth

    The Only 3 Reasons to Have an Irrevocable Trust

    Only put your assets in an irrevocable trust for one of these three reasons.
  4. Financial Advisor

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  5. Retirement

    How Private Split-dollar Life Insurance Works

    Understand how a private split-dollar life insurance plan can help leverage gifts and reduce estate taxes.
  6. Financial Advisor

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  7. Managing Wealth

    Mistakes to Avoid When You Own Life Insurance

    How to avoid some common mistakes that can cause tax and inheritance problems when you own life insurance.
  8. Insurance

    The Basics of Premium Financing for Life Insurance

    Here's a look at the role premium financing plays in life insurance and how it works.
  9. Financial Advisor

    When to Trust a Revocable Trust

    Unsure of how your assets will be dispersed once you're gone? Here's how setting up a revocable trust while you're here can be a big benefit.
RELATED TERMS
  1. Insurance Trust

    An irrevocable trust set up with a life insurance policy as the ...
  2. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  3. Irrevocable Income-Only Trust - IIOT

    A type of living trust often used for Medicaid planning. It protects ...
  4. Beneficiary Of Trust

    A beneficiary of trust is a person for whom a trust was created, ...
  5. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  6. Rabbi Trust

    A trust created for the purpose of supporting the non-qualified ...
Hot Definitions
  1. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  2. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  3. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  4. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  5. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  6. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
Trading Center