Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust is the owner and beneficiary of life insurance policies, usually on the lives of the donor and the donor's spouse. Since the trust, and not the donor, owns the policy, the insurance proceeds will not be included in the donor's federal gross estate. ILITs allow clients to replace the value of estate assets given to charitable entities. They are also beneficial for clients who wish to increases the value of assets left for their heirs at reduced tax costs. Irrevocable Life Insurance Trusts are generally structured so that the initial gift and subsequent gifts to the trust qualify for the annual gift tax deduction.

How does an Irrevocable Life Insurance Trust Work?

A donor will establish a trust, then transfer a new or existing insurance policy to the trust. The donor then transfers liquid assets sufficient to pay the first year's premium to the trust. Each year, the donor makes a gift to the trust sufficient to pay the premiums due. At death, the life insurance proceeds are paid to the trust and distributed to beneficiaries under the terms of the trust.