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Horizon Elder Law & Estate Planning Blog

Tuesday, August 13, 2019

What Is an Irrevocable Life Insurance Trust?

Have you taken steps to lower the taxable value of your probate estate? Are you working with a California estate planning attorney to ensure that your heirs will not incur substantial taxes or debts when they inherit your assets after death? If so, you may want to discuss an Irrevocable Life Insurance Trust (ILIT) with your attorney, especially if you have taken all steps to avoid estate taxes, but you still need additional methods of providing a legacy for your loved ones without creating a tax burden for them.

How Can an Irrevocable Life Insurance Trust Benefit My Heirs?


Your Irrevocable Life Insurance Trust (ILIT) is a separate entity that holds ownership of one or more life insurance policies. The ILIT is also the beneficiary for the life insurance policies. Upon your death, the trust receives the proceeds from the policies. The trustee disburses the funds to the trust beneficiaries according to the terms of the trust.

Some high-net-worth couples use ILITs to create an income stream after a spouse’s death. The funds are held in the trust and disbursed to the surviving spouse in incremental payments. By disbursing the funds in increments, the money is not included in the spouse’s estate if sums remain in the trust upon the surviving spouse’s death. A successor beneficiary receives the remaining funds.

Funding an Irrevocable Life Insurance Trust

You may transfer ownership of existing life insurance policies to the trust after creating the trust or transfer money to the trust to allow the trust to purchase the life insurance policies. Allowing the trust to purchase the life insurance policies is preferable to avoid problems if you die within three years of transferring policies to the trust. The IRS includes any proceeds from life insurance policies transferred to the trust within three years of your death as part of your estate for estate tax purposes. This fact is not a problem if the trust purchases the life insurance policies.

Some individuals allow an ILIT to purchase and own a high-dollar life insurance policy so that the individuals can use the trust to pay the premiums. They transfer funds to the trust so that the trust can pay the insurance premiums.

You can avoid gift taxes accruing on the money paid to the trust each year to pay the policy premiums by sending a special notice to the trust’s beneficiaries telling them that they can request their share of the money paid to the trust within a specific time. The beneficiaries do not request the funds, but the notice effectively does away with any gift taxes for the transfer of money to the trust. Of course, this is contingent upon your heirs understanding the benefits of the ILIT and forfeiting their right to claim any funds paid to the trust.

Call a California Estate-Planning Attorney for More Information about ILITs

As with any trust, there may be downsides associated with using an ILIT in your estate plan. One of the biggest downsides is that it is an irrevocable trust, so it typically cannot be changed or dissolved. However, for some individuals, an ILIT provides benefits that greatly outweigh any issues or problems.

To determine if an ILIT would benefit your family, discuss your goals and needs with a California estate planning attorney.

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