Definition of an Irrevocable Life Insurance Trust
An irrevocable life insurance trust, commonly known as an ILIT, is an effective estate planning tool. An ILIT has many of the same characteristics that regular irrevocable trusts do; however the main difference is the type of assets in the trust. Although very effective for estate planning, many shy away from these trusts because they are unable to be altered. All of the following characteristics must be present for an ILIT to work properly.
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Grantor
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A grantor is the individual who wishes to establish the trust. In the case of an ILIT, it would be who the insurance policy covers. The grantor's main benefit from establishing this type of trust is reduction of estate tax. He also is able to provide his family and heirs with financial security after his death.
Trustee
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The independent third party who ownership is transferred to is called the trustee. The trustee manages the trust for the benefit of the beneficiaries and must to do so impartially. This trustee can be another individual; however, many financial institutions are named as trustees because of their professional abilities.
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Assets
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All trusts must have some sort of assets, and in the case of an ILIT, the main asset is a life insurance policy. This policy covers the grantor but is not owned by the grantor; rather it is owned by the trustee. This change in ownership allows the policy to be excluded from the grantor's gross estate and thus reduces the amount of estate tax possibly owed. Other assets can be included in an ILIT, as well such as stocks, bonds or cash.
Beneficiary
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There must be a stated beneficiary in an ILIT. Usually a spouse, child or both are named as the beneficiary, although they are certainly not limited to these individuals. When the grantor/insured dies, these stated beneficiaries will receive the benefits of the life insurance policy.
Consideration
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One rule that must be considered when forming an ILIT is the "three-year rule." This rule states that if an existing insurance policy is transferred into the trust, ownership must be held by the trustee for at least three years for it to be considered out of the insured's estate. If a new policy is bought, this rule does not apply.
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References
- Photo Credit signing a contract image by William Berry from Fotolia.com
