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Wills and estate planning

What is a life insurance trust or ILIT trust?

Life insurance is one of the most important long-term financial planning tools you can consider.

A quality policy can protect loved ones while bringing you some much-needed peace of mind and financial benefits. 

The irrevocable life insurance trust (ILIT)

In some cases, life insurance can add complexities to the estate planning process. That's where an irrevocable life insurance trust (ILIT) can help you better manage taxes and other implications of passing assets to the next generation.

What is an irrevocable life insurance trust?

An ILIT is a powerful estate planning vehicle you can use in tandem with a life insurance policy to manage financial issues around life insurance assets and benefits.

Like other trusts, an ILIT is its own legal entity that can hold other assets. It has its own tax ID number. A grantor creates a trust which is managed by a trustee. Beneficiaries are the people, nonprofits or other organizations picked to get the assets after a payout. These terms are consistent across different types of life insurance trusts, and noninsurance-related trusts, as well.

How does an ILIT work?

When setting up an ILIT, the grantor can place a life insurance policy inside the trust. This means that the trust owns the policy, not the grantor. It can be a new policy or existing policy, but there can be some additional tax challenges for existing policies with a large cash value.

Putting the life insurance policy in the trust can remove it from the grantor's personal assets. As an irrevocable trust, once the life insurance is owned by the trust, you can't take it back. But this also means that, if you pass away and the life insurance policy makes a substantial payout, the payout goes to the trust, excluding it from your estate. For large estates, this can lead to major tax savings when passing on assets to heirs.

The trustee is responsible for managing payouts to the beneficiaries. This person can ensure a young heir doesn't squander his or her inheritance, while ensuring the grantor's wishes are followed.

In addition to the tax benefits and ability to put a trusted person in charge, a trust also adds privacy to an estate settlement, as trusts don't have to be approved through the public probate process by a judge.

Choosing insurance

If you are picking a new life insurance policy while setting up an ILIT, you are in a great position to pick an ideal policy for your personal wishes and family's needs. This can be a term life insurance policy but more likely a permanent policy, like universal life insurance.

There is no hard rule about what types of life insurance you should include in your ILIT, so it may be wise to work with a financial advisor, tax professional or trusted legal counsel to ensure you reach your desired result.

Benefits of a life insurance trust

Naming your trust as the beneficiary of your life insurance policy can give you more control over how the proceeds are distributed. For example, if you name your spouse or partner as the beneficiary of your life policy and he/she is incapacitated at the time of your death, the court may take control of the money and insist on court supervision. However, if your trust is the beneficiary of the policy, the trustee can use the proceeds to provide for your spouse or partner directly, without any court interference.

Other benefits can include:

  • Providing immediate cash to pay estate taxes and other expenses
  • Helping to reduce estate taxes by excluding life insurance proceeds from your estate
  • Avoiding delays and legal fees associated with probate
  • Proceeds are received free from income and estate taxes
  • Puts you in control over the insurance policy and how proceeds are used after you're gone
  • Can provide income to spouse without insurance proceeds being included in spouse's estate

Other potential estate planning issues

Trusts can solve additional pain points for beneficiaries, but you have to be careful to make sure it all works out as planned without unintended consequences. For example, in some cases, benefits could increase someone's assets enough that he or she could lose out on government benefits like Medicaid.

This is where financial advisors and tax experts are even more important. If you have any doubts working with a life insurance trust, consider working with an expert; it can save you and your family significant stress and money down the road.

Life insurance trusts and estate planning

While there may be some paperwork and upfront costs when getting started, creating a life insurance trust can lead to a big payoff in tax savings and added control over your estate.

Want to learn more about your life insurance options? Read about choosing a life insurance company.


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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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