Insurance Trust


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.

  1. Bypass Trust

    An estate-planning device used to pass down assets after death ...
  2. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost ...
  3. Trust-Owned Life Insurance - TOLI

    Life insurance that resides inside a trust. Trust-owned life ...
  4. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  5. Trustee

    A person or firm that holds or administers property or assets ...
  6. Pour-Over Will

    A will established by an individual who has already taken the ...
Related Articles
  1. Options & Futures

    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.
  2. Retirement

    Establishing A Revocable Living Trust

    This arrangement allows you to have more control over your estate - both before and after your death.
  3. Personal Finance

    Get Ready For The Estate Tax Phase-Out

    Changes to federal legislation will affect how your assets are treated once you're gone - be prepared.
  4. Professionals

    Charity or Retirement Saving: Which to Prioritize?

    Financial planners need to help clients with their financial goals but also support them in their philanthropic endeavours.
  5. Professionals

    How Legacy Planning Can Help Capture New Clients

    Don’t underestimate the importance of legacy planning with your clients—it could serve as method for you to create new business with any heirs.
  6. Professionals

    Tips for Retaining Your Client's Heirs

    It's a good idea to start working with your clients' children early on to forge relationships and hopefully continue to manage that wealth.
  7. Insurance

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  8. Insurance

    Using LinkedIn to Find Life Insurance Leads

    Learn how LinkedIn can help you generate leads as a life insurance agent, and understand the steps to turn your profile into a lead-generating machine.
  9. Savings

    Passing Down Values and Money to the Next Generation

    Amassing wealth to pass down to your kids is great unless your values don't come with it. A priceless gift is teaching them to be financially responsible.
  10. Investing

    Estate Planning for Singles

    Now that singles dominate the population, it's important they understand the essentials of estate planning for indivdiuals.
  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 Full Answer >>
  2. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  3. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>
  4. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  5. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  6. Can your life insurance company sue you?

    A life insurance company generally cannot sue you, but it can sue your estate. The company may do this in order to recover ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. 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. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!