What Is An Irrevocable Life Insurance Trust Notes?


If you are starting your estate planning process, an ILIT (irrevocable life insurance trust) will provide peace of mind. If you have young beneficiaries or sizeable estate, the trust will be able to provide control over a life insurance policy.

The irrevocable aspect of the trust ensures that the creator or the grantor will not be able to change it after it is setup. ILIT is primarily used as an estate planning and financial planning tool to protect assets subject to high estate taxes.

What Do You Need to Know About an Irrevocable Life Insurance Trust?

A revocable trust enables the grantor to make changes to the trust. You will also be able to end the trust if you want to. An irrevocable trust will not allow any changes to be made after it is setup. Only beneficiaries will be able to change the trust.

Revocable trusts are more common as they offer flexibility to the trust creator. An irrevocable life insurance trust is a good idea if you want to save taxes.

A grantor will set up the irrevocable trust and fund it. Transfers and gifts are then made to the trust. Transfers and gifts are permanent. Changes not allowed to the trust and its funds after set up.

The trustee manages the trust. Distributions made to beneficiaries are also managed by the trustee. The trustee who manages the trust is different from the grantor.

Benefits of an Irrevocable Life Insurance Trust

  • Lower Estate Tax

Death benefits will not form part of the gross estate when you opt for an irrevocable trust. This means the benefits are not subject to federal and state estate tax.

The trust will also be able to cover debts and estate tax costs when the estate makes the purchases. The grantor will not be able to make the purchases as the estate is now part of the trust.

It is important to know that even though the estate is exempt from estate taxes, the beneficiary’s estate will be subject to such taxes. The tax burden shifts to the beneficiaries.

When ILIT is drafted properly, it helps provide liquidity. This will help pay estate taxes and other expenses and debts. It is done through a loan or purchasing assets from the estate of the grantor.

Lifetime gifts will help reduce the taxable estate. This is done by transferring assets into an irrevocable life insurance trust.

  • Protect Assets from Creditors

An irrevocable trust will be able to protect you from certain legal proceedings. Protect assets from creditors by setting up the trust.

The creditors, however, will be able to attach distributions made from ILIT.

  • Avoid Gift Taxes

The contributions by the grantor to the beneficiaries are considered gifts. If you want to avoid gift taxes, it is important that the trustee notifies the beneficiaries about the right to withdraw.

The letter notifies the beneficiaries right to withdraw for a 30-day period.

After the 30-day period, the trustee will be able to pay the life insurance premium using the contributions.

The transfer for the annual gift tax can be excluded as the letter makes the gift a present instead of future interest. This helps avoid the need to file a gift tax return.

  • Leaving Assets to Minors and Ensuring Responsibility

Minors are not equipped to handle large amounts of money and assets. An irrevocable trust will allow you to put restrictions in place to protect the assets.

Restrictions such as the beneficiaries reaching a certain age to gain access to the assets can be put in place. The creation of a trust will help ensure responsible behavior from adults or minors with reckless spending habits.

The trust is supervised by an appointed trustee. The assets will be distributed as per the grantor’s wish. This provides asset protection for the beneficiaries.

As ILITs are not owned by the beneficiaries, the assets are protected even if there is future litigation involving the beneficiaries.

Linking the assets to the beneficiary is difficult. This prevents creditors from accessing the assets.

  • Government Benefits

Trust beneficiaries receiving government aid (Medicaid or Social Security Disability Income) are protected with the proceeds received from a life insurance policy purchased by an ILIT.

The trustee will be able to control how trust distributions are used. This is done carefully so that it doesn’t obstruct the beneficiary’s entitlement to get government aid.

  • Legacy Planning

The generation-skipping transfer tax stipulates a 40% tax on transfers and gifts in trust. The tax is also applicable when the gift or transfer is made to unrelated persons more than 37.5 years younger to the donor.

Related persons who are more than at least a generation young than the donor will also be covered as per the tax provisions. Donors gifting assets to grandchildren instead of children is a common example.

ILIT will help the grantor leverage the generation skipping transfer tax exemption. Gifts to the trust are used to fund and buy the insurance policy.

As the death benefits proceeds are excluded from the estate of the grantor, multiple generations of the family (children, grandchildren, and great-grandchildren) will be able to benefit from the trust assets.

Downsides to an Irrevocable Life Insurance Trust

  • There are certain tax benefits that become applicable only when the grantor lives three or more years after transferring the insurance policy to the trust. IRS will start including the insurance proceeds if the period is less than that specified.

When ILIT purchases the insurance policy, you will be able to avoid a three-year period that is specified. The trust will have to fund to pay the premiums.

  • When you give the trust money to a policy it becomes subject to the gift tax. The gift taxes can be avoided if beneficiaries are sent letters notifying them that the money is not immediately accessible to them.
  • The biggest downside of ILIT is that it cannot be changed after it is established. You will have to relinquish complete control of assets. Apart from this dissolution of trust is not possible unless payment for premiums is not stopped.
  • When the beneficiaries receive the estate, they will have to pay sizeable taxes.

How to Setup an ILIT?

Setting up an ILIT is a complex process. Start the process by selecting a lawyer specializing in estate planning.

Before you draft the trust document you will have to take the following decisions:

  • Who will be the trustee of ILIT?
  • Who will be the beneficiary or beneficiaries of the proceeds of the insurance?
  • Will you be transferring an existing policy to the trust or buying a new life insurance policy?

Before you make these important decisions, it is advisable to give them a lot of thought. You will not be able to change any of these decisions after you set up an irrevocable trust.

ILIT is named as the beneficiary of the life insurance policy. This means the payment will go directly to the ILIT in the event of your death.

The beneficiaries will receive benefits without paying any estate or income taxes. Fund the trust for payment of the premiums. This ensures that the insurance policy doesn’t lapse.

Who Are the Beneficiaries of an ILIT?

The primary beneficiary of the insurance policy is ILIT. Death benefits are transferred into ILIT. These benefits are held in trust for the benefit of beneficiaries named in the trust documents.

If the proceeds of the trust are held for the benefit of the spouse, regular incremental payments are received instead of a lump sum amount. The incremental payments are not taxed.

What Are the Incidents of Ownership?

If the insurance policy is owned and retained by you, you will be able to change the beneficiaries or withdraw the cash value at any point. This means the tax authorities will include the proceeds of the insurance policy when calculating the estate value.

If the proceeds are high it will make the estate susceptible to estate taxes. This is possible when the estate is the beneficiary of the policy.

The policy will be an asset of the estate if it is owned at the time of death and even if children, grandchildren or great-grandchildren or someone else is named as beneficiary.

How to Dissolve an ILIT?

After an irrevocable trust is set up it cannot be undone. Premiums will need to be paid to keep the insurance policy in effect. If you want to dissolve the trust all that you need to do is to stop the payments for the premium.

The insurance policy will lapse if the premiums are not made.


An irrevocable life insurance trust is a good idea if you have a significant amount of assets and wealth and you want to protect it after you die. This will also help avoid creditors and high estate tax.

You do need to remember that ILIT may not be suitable for everyone. After you set up the trust, you will not be able to make any changes to it. Only beneficiaries of the trust will be able to approve any change to the trust.


Life Insurance

Life insurance is a type of insurance policy designed to provide financial protection for loved ones in the event of the policyholder’s death. It is a contract between the policyholder and the insurance company, in which the policyholder pays premiums in exchange for a lump-sum payment, or death benefit, to their beneficiaries upon their death.

There are two primary types of life insurance: term life insurance and permanent life insurance. Term life insurance provides coverage for a specified period of time, typically 10-30 years, and is designed to provide financial protection for loved ones during that time. Permanent life insurance, on the other hand, provides coverage for the policyholder’s entire life and often includes a cash value component that can be used for a variety of purposes.

The cost of life insurance premiums can vary depending on a variety of factors, including the policyholder’s age, health, and lifestyle. Younger, healthier individuals will typically pay lower premiums than older individuals or those with health issues. Smokers or individuals with high-risk hobbies or occupations may also pay higher premiums.

The death benefit amount can also vary depending on the policyholder’s needs and budget. Policyholders should consider their outstanding debts, future financial obligations, and the needs of their loved ones when determining the appropriate amount of coverage.

Life insurance policies can also include optional riders, or additional coverage options, that can provide additional benefits. Examples of riders include accidental death and dismemberment coverage, which provides additional benefits if the policyholder dies or is injured as a result of an accident, and disability income coverage, which provides income replacement if the policyholder becomes disabled and unable to work.

One of the primary benefits of life insurance is that it can provide peace of mind and financial security for loved ones in the event of the policyholder’s death. The death benefit can be used to cover a variety of expenses, including funeral costs, outstanding debts, and future financial obligations, such as a child’s college education.

In conclusion, life insurance is an important investment for individuals who want to provide financial protection for their loved ones in the event of their death. There are a variety of life insurance options available, and policyholders should consider their needs, budget, and the needs of their loved ones when selecting a policy. Working with a licensed insurance professional can help ensure that the policyholder selects the right type and amount of coverage for their needs.



Insurance is a way to protect against financial loss. It involves paying a premium to an insurance company in exchange for the promise of payment or reimbursement for certain losses or damages. Insurance can help individuals, businesses, and organizations manage risks and protect against unexpected events.

There are many different types of insurance available, including:

  1. Health Insurance: This type of insurance helps cover the cost of medical expenses, such as doctor visits, hospital stays, and prescription drugs.
  2. Life Insurance: Life insurance provides a lump-sum payment to the insured’s beneficiaries in the event of their death. It can help provide financial security for loved ones and cover expenses such as funeral costs and outstanding debts.
  3. Auto Insurance: Auto insurance provides coverage for damage or injury caused by a car accident. It can also provide coverage for theft, vandalism, and other incidents.
  4. Homeowners Insurance: This type of insurance helps protect homeowners against damage or loss to their property, as well as liability for injuries or damage caused to others on their property.
  5. Renters Insurance: Renters insurance provides coverage for personal property and liability for renters.
  6. Business Insurance: Business insurance provides coverage for various types of risks that businesses may face, such as liability, property damage, and employee injuries.

Insurance policies can vary widely in terms of coverage, exclusions, and premiums. It’s important to carefully review any insurance policy before purchasing it and to understand what is covered and what is not.

Insurance companies use various methods to assess risk and determine premiums, including actuarial science, statistical analysis, and underwriting. Factors such as age, health status, driving history, and location can all impact insurance premiums.

In conclusion, insurance is a way to protect against financial loss and manage risks. There are many different types of insurance available, including health insurance, life insurance, auto insurance, homeowners insurance, renters insurance, and business insurance.

It’s important to carefully review any insurance policy before purchasing it and to understand what is covered and what is not. Insurance companies use various methods to assess risk and determine premiums, and factors such as age, health status, driving history, and location can all impact insurance premiums.

Prepare and write by:

Author: Mohammed A Bazzoun

If you have any more specific questions, feel free to ask in comments.


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