Irrevocable Life Insurance Trust
An irrevocable life insurance trust (ILIT) is a trust which holds one or more life insurance policies.
The ILIT has a Trustee who is the owner of and responsible for paying the premiums on the life insurance policy. The premiums are given to the Trustee by the Trustmaker and the life insurance is on the life of the Trustmaker.
Generally, the premiums given by the Trustmaker are below the amount which can be given to someone without triggering a gift tax ($13,000 per person during 2009). Because the Trustee is not the person who is going to benefit from the life insurance policy, the Trustmaker is technically giving the gift to the beneficiaries of the ILIT. This allows the $13,000 exclusion to be multiplied by the number of beneficiaries of the Trust. Thus, if there are four beneficiaries, the Trustmaker can currently give $52,000 per year to the Trustee without triggering a gift tax (four beneficiaries times $13,000 each).
The result can be a significant amount of life insurance going to your beneficiaries without being included in your taxable estate. The ILIT thus serves two purposes:
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It allows a reduction of the Trustmaker’s overall gross estate by the premiums going to the Trustee
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It allows the beneficiaries to collect the face value of the life insurance upon the death of the Trustmaker. This face value of life insurance does not incur any estate taxes or income taxes on the part of the Trustmaker or the beneficiaries.
There are many requirements which must be strictly met for the ILIT to benefit the Trustmaker and the beneficiaries.