Life Insurance Trust
An irrevocable trust specifically designed to own life insurance policies, removing the death benefit from the insured's taxable estate. The trust pays premiums and receives the death benefit, which is then distributed to beneficiaries according to the trust terms.
Example
“To avoid estate taxes on his $2 million life insurance policy, Robert established a life insurance trust that will distribute the proceeds to his children outside of his taxable estate.”
Memory Tip
ILIT (Irrevocable Life Insurance Trust) = 'I Leave It to Trust' - you're trusting the trust to handle your life insurance outside your estate.
Why It Matters
Life insurance trusts can save wealthy families significant estate taxes while providing liquidity to pay estate costs. Without proper planning, large life insurance death benefits can push estates over federal tax exemption limits, creating unexpected tax burdens.
Common Misconception
People think they can change their mind about life insurance trusts later, but these trusts are irrevocable - once established, you cannot easily modify or dissolve them. Also, many assume the trust eliminates all taxes, but gift taxes may apply when funding premiums.
In Practice
Jennifer has a $3 million estate and a $1 million life insurance policy. Without planning, her total $4 million estate would exceed the $12.92 million federal exemption if she had other assets, potentially triggering estate taxes. She creates an irrevocable life insurance trust and gifts $15,000 annually to cover premiums. Upon her death, the $1 million death benefit passes to her children through the trust, completely avoiding estate taxes and saving approximately $400,000 in taxes.
Etymology
Combines 'life insurance' with 'trust' from Old French 'truste' meaning confidence or faith. This estate planning tool developed in the mid-20th century as tax laws made large life insurance payouts subject to estate taxes.
Common Misspellings
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Related Terms
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See Also
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