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What Is an Irrevocable Life Insurance Trust?

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An irrevocable life insurance trust (ILIT) is a trust created by you that will hold and control a term or permanent life insurance policy or policies while you are alive. You select an independent trustee to manage the policy and pay the premiums. Do not worry; you can have a trust protector added to the document who can remove and replace a trustee at any time. At your death, the trust receives and distributes the death proceeds to your selected beneficiaries. So why create an ILIT? If structured properly, the death benefits, along with any accumulated cash value, of the policy are not counted as part of your estate for estate tax purposes. In addition, assets in the trust are shielded from your own lawsuits and creditor claims during your life. Moreover, in 2021, some timely estate tax savings opportunities may make creating an ILIT more appealing. For instance, you could take advantage of the current generous gift tax rates and make a large gift into the trust to pay the insurance premiums in the future. With the current congress considering passing legislation lowering your ability to gift assets to loved ones and limiting how much you can pass to your family at death, pre-funding an ILIT ensures that even in the event of changes to the tax law, the gift has been made based upon today's laws and the funds are available in the future.

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