Insurance Trust

A A A

DEFINITION

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.

INVESTOPEDIA EXPLAINS

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. Bypass Trust

    An estate-planning device used to pass down assets after death without subjecting ...
  2. Estate Planning

    The collection of preparation tasks that serve to manage an individual's asset ...
  3. Irrevocable Trust

    A trust that can't be modified or terminated without the permission of the beneficiary. ...
  4. Trustee

    A person or firm that holds or administers property or assets for the benefit ...
  5. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost protection ...
  6. Pour-Over Will

    A will established by an individual who has already taken the necessary steps ...
  7. Trust-Owned Life Insurance - TOLI

    Life insurance that resides inside a trust. Trust-owned life insurance is used ...
  8. Reinsurer

    A company that provides financial protection to insurance companies.
  9. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s ...
  10. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose deaths were ...
Related Articles
  1. How To Avoid Taxation On Life Insurance ...
    Options & Futures

    How To Avoid Taxation On Life Insurance ...

  2. Establishing A Revocable Living Trust
    Retirement

    Establishing A Revocable Living Trust

  3. When is it a good idea to use an irrevocable ...
    Home & Auto

    When is it a good idea to use an irrevocable ...

  4. Get Ready For The Estate Tax Phase-Out
    Personal Finance

    Get Ready For The Estate Tax Phase-Out

  5. How Cash Value Builds In A Life Insurance ...
    Insurance

    How Cash Value Builds In A Life Insurance ...

  6. 6 Ways To Capture The Cash Value In ...
    Insurance

    6 Ways To Capture The Cash Value In ...

  7. What's the difference between Social ...
    Retirement

    What's the difference between Social ...

  8. 5 Keys To Lower Life Insurance Quotes
    Insurance

    5 Keys To Lower Life Insurance Quotes

  9. On average, what can I expect my private ...
    Home & Auto

    On average, what can I expect my private ...

  10. Why do I need to pay private mortgage ...
    Home & Auto

    Why do I need to pay private mortgage ...

comments powered by Disqus
Hot Definitions
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  2. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  3. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  4. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  5. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  6. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
Trading Center