Irrevocable Life Insurance Trust (ILIT)

Life Insurance Trust

A life insurance trust, commonly referred to as an "ILIT"  is generally created for the purpose of removing life insurance from one's estate. To effectively achieve this, the settlor must fund the trust with life insurance policy.  The policy may be term, whole or universal life.   When creating a joint trust for a married couple, a "survivorship" or second-to-die policy is generally secured, so the death benefit would not be paid until the surviving spouse passes, or second-to-die away.

How is the Life Insurance Trust Funded?

The life insurance trust must be irrevocable, and can be funded by gifting or selling an existing policy, or the trust may acquire the policy on the settlor's life.  The settlor creates an irrevocable trust and may gift an existing life insurance policy to the trust.  A  policy gift  is generally beneficial as they usually have a lower present value in relation to expected future value, do not require professional management, and are not generally used to produce income to meet living expenses.  The gift into the life insurance trust will have a three year look back for estate inclusion purposes.  The look-back can be avoided by selling the policy and holding a promissory note. Alternatively, the trust may acquire a new policy on the settlor's life. 

What is the Outcome?

Upon the death of the settlor (or second-to-die, for those joint trusts and policies), substantial liquid assets are available to named beneficiaries without the proceeds being subject to tax in the settlor's (or settlor's spouse) estate.  

Can I Change Beneficiaries of the Policy in Trust?

No.  It is important to note that for the life insurance trust to properly remove the proceeds of the policy from the settlor's estate, no incidents of ownership can exist.  That means, there can be no powers held by the settlor, including, but not limited to, the power to change beneficiaries, power to surrender, cancel, assign or pledge the policy, or power to borrow against the cash value.

What if Circumstances Change?

Most Irrevocable Trust precludes change or modifications that would render them ineffective.  However, practically speaking, should circumstances change where the Life Insurance Trust becomes no longer necessary, failure to make premium payments will effectively void the policy and trust.

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