What are the benefits of an irrevocable (life insurance) trust?
An irrevocable (life insurance) trust (often called an “ILIT”) is a form of irrevocable trust formed for the primary purpose of owning one or more life insurance policies. The trustee of the ILIT may either apply for and own a new policy or may receive transferred policies subject to the so-called “three-year rule” (that is, if the former owner of the policy dies within three years from the date of transfer, the death benefits are includible in his/her taxable estate). The primary reason that ILITs are used is to remove the value of the death benefit from the taxable estate of the decedent. Although death benefits are received by the beneficiaries free from income tax, the policy proceeds (as well as cash value) are includible in the decedent s taxable estate. As a result, in the situation where the estate is otherwise taxable, the net benefit to the heirs from an insurance policy may be reduced by as much as 50% (assuming the current estate tax rate). Under the ILIT agreement, the tru
