Irrevocable Life Insurance Trusts

A popular type of ILIT for saving estate tax is the irrevocable life insurance trust. It works this way: you transfer ownership of your life insurance policy to an ILIT for the benefit of your spouse and children. When you die, the life insurance proceeds are paid to the life insurance trust. The trustee then manages and distributes the proceeds according to the trust instrument. If you die more than three years after the transfer, the life insurance proceeds will not be included in the calculation of your estate tax. If you die within the three-year period, the proceeds will be included in your gross estate. This three year look-back rule for life insurance transfers may be avoided by creating the trust first and having the trust purchase the life insurance policy. The irrevocable life insurance trust is especially attractive because it does not require giving away your assets other than what may be necessary to arrange for payment of annual premiums. Careful planning must be undertaken to ensure that all tax law requirements are met.