Wills & Trusts - Irrevocable Life Insurance Trust (ILIT)

An irrevocable life insurance trust, or ILIT, is a unique legal document to help keep the proceeds of a life insurance policy outside of the estate and thus potentially free of estate tax and income tax. The ILIT is set up so that it becomes the owner and premium payor of an individual life insurance policy or a survivorship life insurance policy (sometimes called second to die life insurance or joint & survivor life insurance).

Money is transferred into the trust and the trustee purchases the policy. When the insured (or insureds on a survivorship life insurance policy) dies, the life insurance proceeds go to the trust for the beneficiaries, usually the children. The purpose of this whole procedure is to have the life insurance proceeds not become part of the estate where they would be taxed. This type of trust is commonly used in addition to a tax efficient estate plan consisting of a pour-over will and living trust with family and marital deduction trusts when the estate looks to exceed the tax exemption for the individual and removal of the life insurance from the estate will alleviate or reduce this problem.