Irrevocable Life Insurance Trust
One way to remove life insurance proceeds from a taxable estate is to create an irrevocable life insurance trust (ILIT). An ILIT is an irrevocable trust created for the purpose of owning a life insurance policy. The insurance trust is a contract between a grantor and a trustee to administer an insurance contract for the benefit of the named beneficiaries. The trust cannot be rescinded, amended or modified in any way after it is created. Once the grantor contributes property to the trust, they cannot later reclaim ownership of the property or change the terms of the trust. Therefore, the proceeds are not included as part of the grantor's estate.

In many cases, it makes sense to find an outside source to be the trustee of an irrevocable life insurance trust. This could be a trust department at a local bank or financial institution but there may be additional costs involved. 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. In addition, the ILIT can also be structured so that the trust will provide benefits to the insured's surviving spouse without inclusion in the surviving spouse's gross estate either.

Also, upon completion of the transfer, if the grantor or transferor dies within three years of the date from which the policy was transferred, the life insurance proceeds will be included in the grantor's estate for tax purposes. The beneficiary still receives the proceeds; however, the estate will have to report the proceeds when computing the estate tax. The three-year rule can be avoided if the life insurance policy is purchased at the outset by the trustee of the ILIT. This way there is no gift or transfer.



Estate and Gift Taxation

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. 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.
  4. Insurance

    How To Avoid Taxation On Life Insurance Proceeds

    Decrease the value of your taxable estate and prevent the tax man from getting you one last time.
  5. 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.
  6. Managing Wealth

    What's an Irrevocable Trust?

    In an irrevocable trust, the grantor gives up the right to revise, amend or terminate the trust without the permission of the beneficiary. An irrevocable trust is best used as an estate-planning ...
  7. Financial Advisor

    Life Estate vs Irrevocable Trust: Which is Better?

    People considering application for Medicaid can put their biggest asset - their home - in a trust that splits ownership of the property.
  8. 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.
  9. 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.
  10. 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.
Trading Center