What is an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust, or ILIT, is simply an irrevocable trust funded with life insurance. It is not just an estate planning vehicle but can also provide benefits during your lifetime.

The benefits of an irrevocable life insurance trust:

• Your spouse can be the trust’s primary beneficiary.
• The trustee can access policy cash values¹ or other assets to make distributions for the benefit of your spouse and children.
• The trustee can loan or sell trust assets to you.
• Your spouse can hold a power to change the trust terms or to distribute trust assets to other beneficiaries.

An ILIT is a vehicle that carries out your instructions on how your assets should be invested, managed, and distributed — for the benefit of your family. You appoint one or more trustees to carry out your wishes, as expressed in the trust document. The use of this type of trust can allow you to make gifts over a period of years that qualify as exempt transfers under the estate and gift tax laws. Assuming the trust is properly structured, the assets held by the trustee will not be included in your taxable estate.

Who Can Serve as Trustee of my ILIT?

You can choose an individual or a trust company. The trustee should be someone who is financially responsible and trustworthy to carry out your wishes.

You may want to consider multiple trustees with at least one family member and one independent person. Examples of potential trustees include your attorney, your CPA, your best friend, or a bank trust department or other professional trustee. With proper planning, you could even name your spouse as a trustee.

You Care About Leaving an Inheritance for Your Children, but Your Primary Concern is Meeting the Needs of You and Your Spouse

We all have goals we want to meet during our lifetime, such as:

• The education of our children.
• A comfortable and financially secure retirement.
• The purchase of a vacation home.

You can transfer assets to your trust without giving up your dreams of a secure future.

While it’s true that you cannot revoke the trust, that does not prevent you from obtaining any benefit from trust assets. Your spouse can be named the primary beneficiary of the trust. The trustee can make distributions of trust assets to your spouse throughout the remainder of their lifetime. These distributions can be used to supplement your spouse’s otherwise available retirement income.

What happens if your spouse dies first? Have you lost access to the trust’s assets? No, the trustee can loan trust assets to you during your retirement years. Any unpaid loan balance reduces the value of your taxable estate at your death — even if the beneficiaries of your estate and your trust are exactly the same.

Choosing a responsible and trustworthy individual or trust company as your trustee can help you carry out your wishes after you’re gone.

• Lifetime goals can be met with the right ILIT.
• Gifting can benefit each potential beneficiary.

The Tax Cuts and Jobs Act of 2017 increased the lifetime gift tax exemption to an indexed amount of $13.99 million in 2025. That means that you and your spouse can each make tax-free gifts of $13.99 million. Unless this is changed by Congress, this enhanced exemption amount is effective through December 31, 2025.

This amount is in addition to the $19,000 (in 2025) per beneficiary annual gift tax exclusion.² You and your spouse can gift $38,000 for the benefit of each potential beneficiary of a properly structured trust.

For example: If you and your spouse have two children and five grandchildren, you can make gift tax free transfers of $266,000 per year to the trust. You can also transfer up to $27.98 million using your lifetime gifting exemption. Your attorney can help create a gifting plan, especially when one spouse is intended to be a beneficiary of the trust.

Note that if your spouse will be the primary beneficiary of the trust, you will have to physically make all of the transfers to the trust out of your own separate property. If you live in a community property state and do not have separate property, your attorney can help you create separate property out of your community funds.

How Long Should my Trust Last?

That question should be decided after you compare the benefits of continuing the trust with the costs of maintaining the trust.

Typically, parents will structure their children’s inheritance to be paid out in installments while the children are gaining financial and emotional maturity. A common example is to structure the trust to distribute one-third of its assets at age 25, one-half at age 30, and the remainder at age 35.

There are certain benefits of maintaining the trust throughout your children’s lifetimes. Assets held in the trust may be completely exempt from your children’s creditors, including a divorcing spouse. Keeping assets in the trust can also shield them from being includable in your children’s taxable estates.

The costs of maintaining the trust include potential trustee and accounting fees. One other potential disadvantage is that your children do not have outright control of the trust assets. However, you can provide for your children’s involvement in the management of the trust by appointing them as co-trustees with an independent trustee.

What Assets Should be Held in the Trust?

Life insurance is an advantageous asset held in an ILIT.

The benefits of an irrevocable life insurance trust:

• The insurance premiums may fit within the allowable annual gift tax exclusion.
• The cash value within an insurance policy is tax deferred.
• Surrenders from the policy are tax free up to the amount of premiums paid.¹
• Most importantly, the insurance death benefit is typically income tax free and is received by the trust at the time most needed by the trust beneficiaries or to help pay estate settlement costs.

The trust can hold other income and non-income-producing assets as well. Closely held business stock and limited liability company (LLC) or family limited partnership (FLP) interests can be gifted to the trust at a discount from fair market value. Rental real estate or vacation home property can be held by the trust.