What is an Irrevocable Life Insurance Trust?

If you are beginning your estate planning process, an ILIT (Irrevocable Life Insurance Trust) will provide you with peace of mind. If you have young beneficiaries or a large estate, the trust may take control of a life insurance policy.

The irrevocable aspect of the trust ensures that the creator or settlor cannot modify it after it is set up. ILIT is primarily used as an estate planning and financial planning tool to protect assets subject to high property taxes.

What should you know about an irrevocable life insurance trust?

A revocable trust allows the settlor to make changes to the trust. You can also end the trust if you wish. An irrevocable trust will not allow any changes after it is set up. Only the beneficiaries will be able to modify the trust.

Revocable trusts are more common because they provide flexibility to the creator of the trust. An irrevocable life insurance trust is a good idea if you want to save tax.

A grantor will establish the irrevocable trust and fund it. Transfers and gifts are then made to the trust. Transfers and gifts are permanent. Unauthorized changes to the trust and its funds after its creation.

The trustee manages the trust. Distributions to beneficiaries are also managed by the trustee. The trustee who manages the trust is different from the settlor.

Benefits of an irrevocable life insurance trust

  • Inheritance tax reduction

Death benefits will not be part of the gross estate if you opt for an irrevocable trust. This means that the benefits are not subject to federal and state estate taxes.

The trust will also be able to cover debts and estate tax costs when the estate makes the purchases. The settlor will not be able to make the purchases because the estate is now part of the trust.

It is important to know that even if the estate is exempt from inheritance tax, the estate of the beneficiary will be subject to it. The tax burden is transferred to the beneficiaries.

When the ILIT is drafted correctly, it helps to provide liquidity. This will help pay property taxes and other expenses and debts. This is done through a loan or the purchase of assets from the settlor’s estate.

Lifetime gifts will help reduce taxable wealth. This is done by transferring assets into an irrevocable life insurance trust.

  • Protect assets from creditors

An irrevocable trust can protect you from certain legal proceedings. Protect assets from creditors by creating the trust.

Creditors will, however, be able to seize distributions made from ILIT.

  • Avoid gift taxes

Contributions from the donor to the beneficiaries are considered as donations. If you wish to avoid gift tax, it is important that the trustee informs the beneficiaries of the right of withdrawal.

The letter informs the beneficiaries of the right of withdrawal for a period of 30 days.

After the 30-day period, the trustee may pay the life insurance premium from the contributions.

The transfer for the annual gift tax can be excluded because the letter makes the gift a gift instead of future interest. This avoids having to file a declaration of gift.

  • Leaving property to minors and ensuring liability

Miners are not equipped to handle large sums of money and assets. An irrevocable trust will allow you to put restrictions in place to protect assets.

Restrictions such as beneficiaries reaching a certain age to access assets can be put in place. Setting up a trust will help ensure responsible behavior from adults or minors with reckless spending habits.

The trust is overseen by an appointed trustee. The goods will be distributed according to the will of the licensor. This provides asset protection for beneficiaries.

As ILITs do not belong to the beneficiaries, the assets are protected even in the event of future litigation involving the beneficiaries.

Tying the assets to the beneficiary is difficult. This prevents creditors from accessing the assets.

  • Government benefits

Trust beneficiaries receiving government assistance (Medicaid or Social Security Disability Income) are protected by the proceeds received from a life insurance policy underwritten by an ILIT.

The trustee will be able to control how trust distributions are used. This is done carefully so as not to interfere with the recipient’s right to obtain government assistance.

  • Legacy planning

The skip-generation transmission tax provides for a 40% tax on transfers and gifts in trust. The tax is also applicable when the gift or transfer is made to unrelated persons more than 37.5 years younger than the donor.

Related persons who are at least one generation younger than the donor will also be covered by the tax provisions. Donors giving assets to their grandchildren rather than their children are a common example.

The ILIT will help the licensor to take advantage of the generation-skip transfer tax exemption. Donations to the trust are used to fund and purchase the insurance policy.

Since death benefit proceeds are excluded from the settlor’s estate, multiple generations of the family (children, grandchildren and great-grandchildren) will be able to benefit from the assets of the trust.

Disadvantages to an irrevocable life insurance trust

  • Some tax benefits only apply when the settlor lives three years or more after the transfer of the insurance policy to the trust. The IRS will begin including insurance proceeds if the period is less than specified.

When ILIT buys the insurance policy, you will be able to avoid a period of three years which is specified. The trust will have to fund to pay the premiums.

  • When you give money from the trust to a policy, the policy becomes subject to gift tax. Gift tax can be avoided if recipients receive letters informing them that the money is not immediately available to them.

  • The biggest drawback of the ILIT is that it cannot be changed after it is created. You will have to relinquish full control of the assets. Apart from this dissolution of trust is only possible if the payment of premiums is not stopped.

  • When the beneficiaries receive the estate, they will have to pay significant taxes.

How to configure an ILIT?

Setting up an ILIT is a complex process. Begin the process by selecting an estate planning attorney.

Before drafting the trust deed, you will need to make the following decisions:

  • Who will be the trustee of ILIT?

  • Who will be the beneficiary(ies) of the insurance proceeds?

  • Are you going to transfer an existing policy to the trust or buy a new life insurance policy?

Before making these important decisions, it is advisable to think about them for a long time. You will not be able to change any of these decisions after creating an irrevocable trust.

The ILIT is designated as the beneficiary of the life insurance contract. This means that the payment will go directly to the ILIT in the event of death.

Beneficiaries will receive benefits without paying estate or income tax. Fund the trust for the payment of premiums. This ensures that the insurance policy does not expire.

Who are the beneficiaries of an ILIT?

The main beneficiary of the insurance policy is ILIT. Death benefits are transferred to the ILIT. These benefits are held in trust for the benefit of the beneficiaries named in the trust documents.

If the trust proceeds are held for the benefit of the spouse, regular progress payments are received instead of a lump sum. Incremental payments are not taxed.

What are property incidents?

If the insurance policy is owned and maintained by you, you can change the beneficiaries or withdraw the cash value at any time. This means that the tax authorities will include the proceeds of the insurance policy when calculating the value of the estate.

If the proceeds are high, this will make the estate vulnerable to property taxes. This is possible when the estate is the beneficiary of the contract.

The policy will be an estate asset if held at the time of death and even if children, grandchildren, great-grandchildren or someone else are named as beneficiaries.

How to dissolve an ILIT?

Once an irrevocable trust is established, it cannot be revoked. Premiums will have to be paid to keep the insurance policy in force. If you want to dissolve the trust, all you need to do is stop premium payments.

The insurance policy will expire if the premiums are not paid.


An irrevocable life insurance trust is a good idea if you hold a significant amount of assets and wealth and want to protect it after your death. It will also help avoid creditors and high property taxes.

You must remember that the ILIT may not be suitable for everyone. Once the approval is set up, you won’t be able to make any changes to it. Only the beneficiaries of the trust will be able to approve any changes to the trust.

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