Irrevocable Life Insurance Trust Author:    Posted under: Life InsuranceLife Insurance Types

An Irrevocable Life Insurance Trust or ILIT is an irrevocable trust that holds a life insurance. As the term irrevocable implies, this kind of trust can’t be changed or amended once it has been signed. The assets that you have put there will stay there and the beneficiaries or

trustees cannot be changed- you cannot add or delete. The only way it can be changed is if the trustee resigns or dies. When you establish your ILIT, you transfer your life insurance ownership to your ILIT beneficiaries or trustee.

The sole or main purpose of establishing an Irrevocable Life Insurance Trust is for estate tax considerations. The trustee pays the income tax on what its assets earn. Since you already transferred your life insurance ownership to your beneficiaries, the proceeds can’t be taxed when you die.

An Irrevocable Life Insurance Trust can also be used to accomplish Charitable Estate Planning. If you make the transfer of your assets to a charitable institution while you’re still alive, then you will receive, in turn, a charitable tax deduction on the year you made the transfer.

John Martin, a lawyer from Menlo Park, gives us five reasons to consider establishing an Irrevocable Life Insurance Trust. They are as follows:

  1. No loss of control over income – producing assets
    An ILIT is an attractive alternative to other estate planning strategies that involve transferring substantial amounts of assets out of one’s estate.
  2. Liquidity Creation
    If an ILIT is structured properly it provides liquidity. An ILIT can help pay a large estate tax bill without selling off assets.
  3. Leveraging the Generation-Skipping Transfer Tax Exemption
    ILIT can also be used to leverage the insured’s GSTT exemption.
  4. Protecting Beneficiaries from Creditors
    By including a spendthrift provision in the trust document, your beneficiaries will be protected from creditors.
  5. Encouraging responsibility
    An ILIT can also help the beneficiaries to engage in good and positive ways of living or behavior. The trustee may choose to pay for positive expenditures that the beneficiary may require. However, the trustee may also choose to withhold funds that would be used for gambling or drug addiction.

It may seem that establishing of Irrevocable Life Insurance Trust is advantageous to an individual. But there is also a downside to this. Some people think that establishing an ILIT is quite complicated and expensive to maintain. It also means that they lose control over the terms of an ILIT and the fact that they cannot use the Cash value of the life insurance.

Procedure to follow when establishing an Irrevocable Life Insurance Trust Fund:

  1. First and foremost is to decide to establish an ILIT. If there is really a need to establish ILIT.
  2. Preparing the terms of the trust and establishment of the beneficiaries as well as choosing the initial and secondary trustees.
  3. Lawyers to draft insurance trust.
  4. Signing of the insurance trust by the client and trustees. The trustee should apply for an employment Identification number.
  5. The trustee should apply for a life insurance and signs application as insurance owner.
  6. Upon completing the application, trustee then pays for the premium.

These procedures may vary depending on where the insurance trust will be made. It is best to consult a lawyer or someone with a good grasp of ILIT before proceeding.

An Irrevocable Life Insurance Trust is an attractive concept especially if there is a tangible need for it. However, good planning is needed to make this arrangement work for you, your trustees and your beneficiaries.



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