An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust that applies for, owns, and maintains life insurance. It’s purpose is to get life insurance cash value and proceeds out of an estate for federal estate tax and generation-skipping tax purposes. Often, life insurance is purchased to equalize inheritances, provide an inheritance, fund tax bills, pay expenses, fund a buy-sell agreement, or benefit a charity. The ILIT does all that without increasing taxes and with little management.
Carefully crafted, the trust itself, as well as sub-trusts, can offer asset protection for trust assets so they can’t be seized in a divorce, lawsuit, bankruptcy, medical crisis, business failure, malpractice claim, and the like. In other words, assets are available to your beneficiaries but can’t be taken from them. You can even protect the assets against your beneficiaries themselves in the event they are spendthrifts, generally bad with money, or suffer from some form of addiction.
Sometimes, an ILIT is used as part of a more comprehensive estate plan, such as with a Charitable Remainder Trust (CRT), which provides an income stream to pay life insurance premiums. Though care is required, ILITs are relatively easy to setup and maintain. That being said, an annual tax return and legal notices notifying beneficiaries of contributions to the trust are required, so often our clients elect to have a professional entity such as a trust company manage trust affairs.