Insurance Trust

AAA

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.

INVESTOPEDIA EXPLAINS '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. Bypass Trust

    An estate-planning device used to pass down assets after death ...
  2. Trustee

    A person or firm that holds or administers property or assets ...
  3. Universal Life Insurance

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

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

    Life insurance that resides inside a trust. Trust-owned life ...
  6. Estate Planning

    The collection of preparation tasks that serve to manage an individual's ...
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

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center