What is an irrevocable life insurance trust?
A. A popular type of trust for saving estate tax is the irrevocable life insurance trust. It works this way: you transfer ownership of your life insurance policy to an irrevocable trust for the benefit of your family. When you die, the life insurance proceeds are paid to the life insurance trust. The trustee then manages and distributes the proceeds according to the trust instrument. If you die more than three years after the transfer, the life insurance proceeds will not be included in the calculation of your estate tax. If you die within the three-year period, the proceeds will be included in your taxable estate. This three year look-back rule for life insurance transfers may be avoided by creating the trust first and having the trust purchase the life insurance policy. Careful planning must be undertaken to ensure that all tax law requirements are met.
You can also establish an irrevocable life insurance trust to remove your life insurance from your estate. The irrevocable life insurance trust becomes the owner of your life insurance policy. However, you must live at least three years after the transfer. At death, the life insurance proceeds will not be in your estate. You can name the irrevocable life insurance trust as the beneficiary of the policy. When you pass away, the life insurance proceeds will be paid according to the instructions of the irrevocable life insurance trust (i.e. to your spouse, children, etc).
This is an irrevocable Trust that cannot be amended or revoked, created for the purpose of owning life insurance, which will pass at death without imposition of estate tax. The life insurance Trust may also invest in other investments. When life insurance is not required to pay death taxes due to the increase in the exemption from estate tax and eventual elimination of estate tax, the cash value of the life insurance may be reinvested in other investments if the Trustee deems other investments will provide a greater return.
Related Questions
- Why is it better to have an irrevocable life insurance trust purchase alife insurance policy on the donor, rather than have the heirs themselves own a permanent life insurance policy with the premium paid by the heirs with gifts by the now- living donor?
- Can I add a new life insurance policy to an existing ILIT (Irrevocable Life Insurance Trust)?
- What are the benefits of an irrevocable (life insurance) trust?
