Insurance Topic
Irrevocable Life Insurance Trust (ILIT)
A trust arrangement that owns and controls a life insurance policy outside the insured’s estate, subject to irrevocability and trust governance rules.
Definition
An irrevocable life insurance trust (ILIT) is a legally established trust that owns a life insurance policy on the life of an insured individual, where the trust is both the policy owner and beneficiary. Once established, the trust terms generally cannot be altered or revoked by the grantor. The structure is designed so that the death benefit proceeds are not included in the insured’s taxable estate, provided applicable legal requirements are met, and the trust maintains independent ownership and control over the policy.
Structural Components
- Grantor: The individual who establishes and funds the trust.
- Trustee: The party responsible for administering the trust and managing the life insurance policy.
- Life Insurance Policy: A policy owned by the trust, often permanent in nature.
- Beneficiaries: Individuals or entities designated to receive trust distributions.
- Trust Agreement: The legal document defining terms, distribution rules, and trustee authority.
Parameters & Conditions
- The trust must be irrevocable to achieve estate exclusion characteristics.
- The grantor cannot retain incidents of ownership over the policy.
- Premium contributions may be treated as gifts to the trust, subject to applicable tax rules.
- Trust administration must follow fiduciary and legal requirements.
- Transfers of existing policies may be subject to look-back periods affecting estate inclusion.
Topic Relationships
Exceptions, Limitations & Boundaries
- Irrevocability restricts the grantor’s ability to modify or terminate the trust.
- Improper structuring or retained control may result in estate inclusion.
- Gift tax considerations may arise from funding the trust.
- Administrative complexity requires ongoing compliance with trust law.
- Transfers of existing policies may be subject to statutory inclusion rules if death occurs within specified periods.
Irrevocable Life Insurance Trust (ILIT): Definitional FAQ
What does “irrevocable” mean in an ILIT?
Irrevocable means the trust cannot generally be altered, amended, or revoked once established.
Who owns the life insurance policy in an ILIT?
The trust itself owns the policy, not the individual insured.
Are death benefits paid directly to individuals?
Death benefits are paid to the trust, which then distributes proceeds according to its governing terms.
Can an existing policy be transferred into an ILIT?
Yes, but such transfers may be subject to legal conditions affecting estate inclusion.