Irrevocable Life Insurance Trust
An irrevocable life insurance trust allows users to pass estate funds from one person to the next while bypassing costly estate taxes.
This type of insurance is often an ILIT's. What makes this type of trust unique from other forms is that it allows not just one estate to escape the cost of estate taxes, but several estates.
It is usually used to help protect the funds (in the form of a trust) in order to benefit children or a spouse.
There are several unique aspects of the irrevocable life insurance trust to understand before investing in them.
First, a life insurance policy that is within this type of trust does not have an owner, legally.
This means that once that insurance policy is in the trust, you do not have the ability to change or cancel the policy.
In situations where you already have a life insurance policy, the ownership of the policy may transfer to the irrevocable life insurance trust.
To accomplish this, the current owner of the existing life insurance policy must sign an irrevocable assignment provided by the insurance company.
The new owner of the life insurance policy becomes the trust and the beneficiary of that trust.
Also, if the original owner of the life insurance policy dies prior to three years after signing the policy over to the trust, the value of the trust is still reported as value in their estate for taxation purposes.
There is a method to skirting this costly problem, though.
In the establishment of the trust, and particularly the transfer of the life insurance to the trust, a clause is included. This clause allows a spouse to receive the death benefit of the life insurance policy even if the life insurance is in the trust, if the initial owner dies prior to the three-year deadline.
This helps because the estate tax marital deduction is applicable.
It is also important to note that an individual can purchase life insurance at the start of the irrevocable life insurance trust and that would allow for there to be no three year limitation.
Those who are looking for a method to reducing owed taxes may benefit the most from an irrevocable life insurance trust.
In addition, if more than the insurance goes to an heir, this is an ideal way to transfer funds to that heir without paying excessive estate taxes.
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