Irrevocable Life Insurance Trust

What Does Irrevocable Life Insurance Trust Mean?

Establishing an irrevocable life insurance trust (ILIT) creates an entity to manage a life insurance policy and distribute its proceeds, typically upon the policyholder’s death. These trusts are primarily set up to exclude the proceeds from estate taxation. Although life insurance proceeds are generally not subject to income tax for the beneficiary, very large policies can push an estate above the federal estate tax exemption, which is what an ILIT is set up to address.

Insuranceopedia Explains Irrevocable Life Insurance Trust

An ILIT is termed irrevocable because, once it is legally established, its terms cannot be changed.

If the policyholder acts as a trustee, they may have the ability to amend the terms. However, if the ILIT is created to avoid estate taxes, it is advised that the policyholder not serve as a trustee. This helps ensure that the policy is not considered part of the policyholder’s taxable estate. Most ILITs are funded with permanent life insurance policies rather than term coverage, since term policies expire after a set number of years and may not be in force when the insured eventually dies.

The policyholder determines how the trustee will distribute the policy’s proceeds and the mode of payment to be used. Once the trust is established, it becomes the official owner of the policy. Because the trust replaces an individual as both owner and beneficiary, the usual considerations around naming a life insurance beneficiary work differently here than they would for a policy left directly to a spouse or child.