DEFINITION of 'Insurance Trust'

An irrevocable trust set up with a life insurance policy as the asset, allowing the grantor of the policy to exempt asset away from his or her taxable estate.

Once the life insurance policy is placed in the trust, the insured person no longer owns the policy, which will be managed by the trustee on behalf of the policy beneficiaries when the insured person dies.

The insurance trust, or irrevocable life insurance trust (ILIT), is often used to set aside cash proceeds that can be used to pay estate taxes, as the life insurance policy should be exempt from the taxable estate of the decedent.

BREAKING DOWN 'Insurance Trust'

One catch on the insurance trust is that the life insurance policy must be transferred to the trust at least three years before the death of the insured. To get around this rule, a new policy can be taken out with a spouse as owner, then placed in the trust.

As an irrevocable trust, changes can only be made by beneficiaries; the owner gives up all control to the trustee. If the size of the taxable estate is below the maximum exclusion figure, it is generally not necessary to set up an insurance trust; in this case the life insurance will be included in the decedent's taxable estate.

RELATED TERMS
  1. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  2. Trust Property

    Assets that have been placed into a fiduciary relationship between ...
  3. Grantor Retained Annuity Trust ...

    An estate planning technique that minimizes the tax liability ...
  4. Guaranteed Issue Life Insurance ...

    A type of financial-protection policy that provides cash to a ...
  5. Cover Note

    A temporary document issued by an insurance company that provides ...
  6. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost ...
Related Articles
  1. 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.
  2. Managing Wealth

    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
  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. 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

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  6. 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.
  7. Managing Wealth

    Can You Trust Your Trustee?

    Ignorance and incompetence can cost you money. Make sure your trustee is up to the task.
  8. Retirement

    Why Own Life Insurance in a Qualified Retirement Plan?

    What are the pros and cons of owning cash value life insurance in a qualified retirement plan?
  9. 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.
Hot Definitions
  1. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  2. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  3. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  4. Indirect Tax

    A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An ...
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Beta

    Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. ...
Trading Center