Irrevocable Life Insurance Trust

There are many reasons to purchase a permanent life insurance policy. One of the most popular is the joy in leaving a large cash death benefit for your spouse and/or future generations. Once all of the paperwork is completed and initial premium is paid, policy owners are comfortable that they are looking out for the financial interests of their family. However, often ignored is the fate of that cash payout. If the death benefit is paid outright to beneficiaries, it is subject to the beneficiary’s creditors, ex-spouses, or the beneficiary’s own irresponsible whims. On the other hand, if that policy is either transferred to or purchased within an irrevocable life insurance trust (ILIT), the death benefit funds can be controlled by a trustee and doled out based on age thresholds, need, or after meeting specific life landmarks.

Additionally, having the ILIT own the policy prevents the IRS from considering the death benefit as part of your estate upon your death, avoiding its inclusion in calculating your estate tax. If the life insurance is being purchased with the intention of using the death benefit to pay estate taxes, it should always be owned by an ILIT or some other trust outside of the estate to avoid estate taxation on the very funds being used to pay the estate tax.