Irrevocable Life Insurance Trusts

Irrevocable Life Insurance Trusts (ILITs) are a common way to generate funds for the support of the insured’s family by holding one or more life insurance policies in an irrevocable trust. Typically, the Trust is the owner and beneficiary of the policies. After the death of the insured, the proceeds are used to support the insured’s family.

The insurance proceeds are not part of the insured’s taxable estate if the insured did not have any “incidents of ownership” in the policies within 3 years of dying. Therefore, the insured should not act as Trustee, and it is preferable to fund an ILIT with cash or other assets, which the Trustee then uses to purchase life insurance, thereby ensuring that the policies held by the Trust are not subject to this 3-year look-back rule.

Sometimes an ILIT is funded with income-producing assets, and the income is then used to pay the annual insurance premiums; this can be problematic from a gift-tax standpoint, so more commonly the grantor will gift money to the trust each year, in an amount below the annual gift tax exclusion amount, to be used to pay the premiums.

ILITs established by married couples often purchase joint and survivor life insurance policies, which insure both spouses and pays a death benefit upon the death of the second spouse, for the support of their children.

ILITs can be extremely beneficial in situations where there would otherwise be a shortage of liquid assets to support the insured’s family and/or to offset the estate tax liability on the insured’s other assets.

If you have any questions or would like to schedule an appointment, please call us at (425) 455-5513, toll free at (877) 455-5513, or info@palmerlegal.com.