Irrevocable Life Insurance Trusts (ILITs)
An Irrevocable Life Insurance Trust (ILIT) is a type of trust designed to own and manage a life insurance policy. Once established, the terms of the trust cannot be changed or revoked by the grantor. The primary purpose of an ILIT is to remove the life insurance proceeds from the grantor’s taxable estate, thus potentially reducing estate taxes.
In an ILIT, the grantor transfers ownership of a life insurance policy to the trust. The trustee manages the policy and ensures that the death benefit is paid to the beneficiaries of the trust upon the grantor’s death. Since the grantor no longer owns the policy, the proceeds are not included in their estate for tax purposes.
For example, if a grantor sets up an ILIT and funds it with an insurance policy worth $1 million, the death benefit paid to the beneficiaries will not be subject to estate taxes, provided the trust is properly structured and maintained.
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