Irrevocable Life Insurance Trusts

An Irrevocable Life Insurance Trust (ILIT) is a sophisticated estate planning strategy that is intended to make proceeds of a life insurance policy available to the insured person's loved ones in a manner that will not subject the policy proceeds to the federal estate tax at the insured person's death. Another objective of the ILIT is to qualify transfers to the Trust, which will most likely be used for payment of insurance premiums, for the federal annual gift tax exclusion (Since 2011, the amount is $13,000 per year, per donee, or $26,000 per year, per donee, for a gift by a married couple).

To avoid having the insurance proceeds subject to the federal estate tax, the ILIT must be designed so that the insured retains no control over the insurance policy once it is held in the Trust. This is why the ILIT cannot be modified once it has been signed and why an independent, unrelated person, the Trustee, should be the person who owns the policy and administers the ILIT - not the insured or the insured's family members.

To qualify transfers (gifts) to the Trust for the federal annual gift tax exclusion the gifts must be gifts of a present interest. This is the reason the Beneficiaries of the Trust are typically given a demand right, that is, a right, for a limited period of time, to withdraw some or all of the transfers of money to the ILIT. In the absence of a demand right, gifts that the insured makes to the ILIT will not qualify for the annual federal gift tax exclusion because they would be classified as gifts of a future interest.

Normally, upon the insured's death, the ILIT will mirror the terms of the insured's revocable living trust, though this is not a legal requirement.