Irrevocable Life Insurance Trust (ILIT)
An irrevocable trust that owns life insurance so proceeds stay outside the insured's taxable estate, avoiding incidents of ownership, with crummey withdrawal powers for gift exclusions.
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Practice This Concept
A life insurance policy is owned by an irrevocable life insurance trust. Who has the authority to change the beneficiary designation on the policy?
The trustee, acting under the terms of the trust — When a trust owns a life insurance policy, the trustee holds the policy as a trust asset and exercises the policyowner's rights - including changing beneficiaries where the trust document permits - in accordance with the trust's terms. The insured has no personal authority over the designation simply because the policy insures his or her life. In an irrevocable trust, the grantor typically surrenders control over the policy: retained incidents of ownership could pull the death proceeds back into the grantor's gross estate for estate tax purposes and defeat the trust's planning purpose. Thus the trustee is the party who can act on the policy.
National insurance concept
Naming a trust as the beneficiary of a life insurance policy is beneficial because:
The trustee controls the distribution of the proceeds over time, and the proceeds generally avoid probate — A trust beneficiary provides controlled distribution: the trustee invests and pays out the proceeds according to the trust document - useful for minor children, spendthrift beneficiaries, or charitable goals - while the proceeds avoid probate because they pass directly to the trustee. A common structure is an irrevocable life insurance trust (ILIT), which also removes the proceeds from the insured's gross estate for federal estate tax purposes. The insured can continue owning the policy unless the policy is actually transferred into an irrevocable trust.
National insurance concept
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