Use Of Life Insurance In Estate Planning - Irrevocable Life Insurance Trust

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 The trust cannot be rescinded, amended or modified in any way after it is created.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

    Pick The Perfect Trust

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

    Estate Planning: Introduction To Trusts

    by Cathy Pareto, CFP®, AIF® (Contact Author | Biography) A trust is an agreement that describes how assets will be managed and held for the benefit of another person. There are many ...
  3. Retirement

    Estate Planning: Marital And Non-Marital Trusts

    by Cathy Pareto, CFP®, AIF® (Contact Author | Biography) Before we begin talking about these types of trusts, let's first begin by introducing the term "unlimited marital deduction." ...
  4. Personal Finance

    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 ...
  5. Investing Basics

    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.
  6. Insurance

    How Private Split-dollar Life Insurance Works

    Understand how a private split-dollar life insurance plan can help leverage gifts and reduce estate taxes.
  7. Insurance

    Use Life Insurance to Help Those With a Disability

    Why and how to use permanent life insurance to help provide for a family member with a disability or special needs
  8. Savings

    How To Set Up A Trust Fund If You’re Not Rich

    Contrary to popular opinion, trust funds are not just for the rich. Middle class citizens can set them up, as well.
  9. Retirement

    Surprising Ways a Trust Could Help Your Family

    Everything you always wanted to know about setting up trusts, in handy glossary form.
  10. Taxes

    Tax-Efficient Wealth Transfer

    Taxpayers with large taxable estates were required to take steps to reduce them before 2011.
RELATED TERMS
  1. Grantor Trust Rules

    Guidelines that state a trust is considered to be a grantor trust ...
  2. Grantor Retained Annuity Trust ...

    An estate planning technique that minimizes the tax liability ...
  3. Revocable Trust

    A trust whereby provisions can be altered or canceled dependent ...
  4. Rabbi Trust

    A trust created for the purpose of supporting the non-qualified ...
  5. Dynasty Trust

    Long-term trusts created to pass wealth from generation to generation ...
  6. Qualified Terminable Interest Property ...

    A type of trust that enables the grantor to provide for a surviving ...
RELATED FAQS
  1. When is it a good idea to use an irrevocable life insurance trust?

    The irrevocable life insurance trust or "ILIT" is a trust that cannot be rescinded, amended or modified in any way after ... Read Answer >>
  2. How do I list the beneficiaries of my life insurance policies if I have a trust? ...

    Because most states protect life insurance policies from creditors, most buyer questions come from the confusion created ... Read Answer >>
  3. 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 >>
  4. Are life insurance trust proceeds taxable?

    I am due 1/3 of a $1 million irrevocable trust from my mom. I want to close out the trust and wonder what taxes may be involved ... Read Answer >>
  5. What is the difference between revocable and irrevocable intervivos trusts?

    Learn what an inter-vivos trust is, the difference between an irrevocable and a revocable inter-vivos trust, and why it is ... Read Answer >>
  6. What are the requirements that a trust needs to meet to be qualified?

    The requirements that a trust must meet to be qualified are as follows: The trust must be a valid trust under state law or ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center