Irrevocable Life Insurance Trusts

AN IRREVOCABLE LIFE INSURANCE TRUST (commonly referred to as “ILITs”) is a Personal Trust that cannot be changed after it has been created. It usually owns one or more life insurance policies. ILITs are widely used in estate-planning as a means to transfer wealth to others without having to pay estate taxes on the value of the death benefits of the life insurance policy. However, in some cases, ILITs are created as a means to provide liquidity to an individual’s estate in order to pay anticipated death taxes. ILITs are also used as “wealth replacement” strategies when an individual has decided to give property or assets from his/her estate to charitable organizations at the time of his/her death. The death benefit proceeds of the insurance policy are intended to be the estate that passes to the heirs. Normally, the death benefit value of insurance policies owned by the insured are included in an individual’s estate for death tax purposes. Likewise, if an individual owned the “incidents of ownership” in the life insurance policy (the rights to borrow against the policy, change the beneficiary, surrender the policy for cash and so on), a calculated value of the policy’s worth is included in the individual’s estate for estate tax purposes.

There are several requirements that must be included and followed in the Trust agreement in order for an ILIT to be valid. Also, transfers to the ILIT may receive the benefit of the annual gift tax exclusion at the time of the contribution to the Trust. Since a contribution to an ILIT is considered an immediate gift to the Trust beneficiaries, certain notices of withdrawal rights must be given to the beneficiaries through the means of “Crummey notices.” If the beneficiaries elect not to exercise their withdrawal rights, the contribution is most often used to pay the annual premium of the life insurance policy.