Irrevocable Life Insurance Trust

The mechanics of this type of trust are as follows: The client who is also the insured person, creates the ILIT, and names the trustee to be the owner and beneficiary of the life insurance policy. Ordinarily, life insurance is taxable in your estate if you own the policy. But a life insurance trust can help avoid the estate tax.

The trust holds the insurance on the client's life to protect the death benefit proceeds from incurring estate tax. The proceeds can then provide additional income to the surviving spouse.

Almost any trust can own insurance policies and receive insurance proceeds. The benefits of an Insurance Trust are as follows:

-Insurance proceeds can be excluded from both your estate and your spouse's estate, escaping transfer taxes at your generation.

-Trust assets are protected from claims by creditors. Physicians and other professionals, and business persons seeking to protect their assets may wish to consider using this technique.

-Investments from insurance proceeds retained in the insurance trust are protected from claims by a divorcing spouse.

-Insurance proceeds included in the trust are not included in the probate estate. This is especially useful for those seeking privacy, as the information is not available for public knowledge.

-Since insurance is usually one of the largest assets in a person's estate, an ILIT can effectively eliminate federal estate taxes in the majority of estates.

It is important to note that the ILIT must be irrevocable, so that in this way, insurance proceeds will not be included in your estate. One drawback is that if you divorce, you cannot change beneficiaries.

When selecting a trustee, it is a good idea to serve as a co-trustee, along with an independent person.

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