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

    A trust is a fiduciary relationship in which the trustor gives ...
  3. Key Person Insurance

    A life insurance policy that a company purchases on a key executive's ...
  4. Life Insurance

    A protection against the loss of income that would result if ...
  5. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an ...
  6. Grantor Retained Annuity Trust ...

    An estate planning technique that minimizes the tax liability ...
Related Articles
  1. 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
  2. Managing Wealth

    Can You Trust Your Trustee?

    Ignorance and incompetence can cost you money. Make sure your trustee is up to the task.
  3. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  4. Financial Advisor

    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.
  5. Retirement

    How Survivorship Life Insurance Works

    Should you buy a survivorship life insurance policy?
  6. Financial Advisor

    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.
Hot Definitions
  1. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  2. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  3. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  4. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  5. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  6. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
Trading Center