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Should I Use an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust (ILIT) can provide peace of mind, as you start your estate planning process. If you have a sizable estate or young beneficiaries, an ILIT can provide control over a life insurance policy that a last will and testament may not.

The word “irrevocable” in an irrevocable life insurance trust (ILIT) means that its creator (also called the “grantor”) can’t change it once it’s set up. This type of trust has its benefits but there are some things to consider before setting it in stone. Revocable trusts are more commonly used, because they have greater flexibility for the trust creator to make changes to the trust terms.’s recent article, “How an Irrevocable Life Insurance Trust (ILIT) Works,” explains that a revocable trust lets the grantor change or even end the trust. An irrevocable trust permits no modifications from the trust creator, once it’s been drafted. The only ones allowed to make and approve changes are the beneficiaries. However, these trusts have some benefits despite their inflexibility.

With an irrevocable trust, death benefits will not be part of your gross estate, so they aren’t subject to state and federal estate taxes. However, while your estate is exempt from estate taxes, they may be subject to taxes in your beneficiaries’ estate, which can shift your tax burden onto them.

An irrevocable trust allows restrictions to be put in place for minors who may not be responsible or equipped to handle large amounts of money. You can set up terms, so beneficiaries have to attain a certain age to gain assets or accounts.

An irrevocable trust can also protect you and your family from creditors.

The IRS says that life insurance payouts are usually not included in your gross assets, but there are exceptions. If you’ve earned interest on a life insurance payout, any interest you received is taxable. In addition, if a life insurance policy was transferred to you by another individual for money, only the sum you paid is excluded from taxes.

There are some drawbacks to an ILIT. Some of the tax benefits of an ILIT only work in if you live three or more years after transferring your own life insurance policy to the trust. Otherwise, the IRS will include life insurance proceeds in your estate for estate tax purposes. The ILIT can buy the policy and avoid that rule, but you’ll have to fund the trust to pay premiums.

Giving the trust money for that policy may also make you subject to gift taxes. However, if you send beneficiaries a letter after each transfer telling them that they don’t have immediate access to the money, gift taxes won’t apply.

The biggest downside to an ILIT is that you can’t change it once it’s established. You give up control of assets and can’t dissolve the trust, unless you simply stop making payment for premiums. Although the trust rids you of certain taxes, your beneficiaries may take on a big tax burden, once they get the assets in your estate.

An irrevocable trust can be complex, even when life insurance isn’t involved. You should work with an experienced estate planning attorney to see if this an option for you.

Reference: (July 19, 2019) “How an Irrevocable Life Insurance Trust (ILIT) Works”

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