What is an irrevocable life insurance trust (ILIT) and its typical purpose?

What is an irrevocable life insurance trust (ILIT) and its typical purpose?

• A. ILIT owns life insurance on the insured, removing policy proceeds from the insured’s estate for estate tax purposes and providing liquidity to fund beneficiaries.
• B. ILIT is a revocable trust that can be altered by the grantor.
• C. ILIT is designed to pass all policy proceeds to the grantor's creditors.
• D. ILIT cannot own a life insurance policy.

Answer: (A)

An irrevocable life insurance trust is used to own a life insurance policy on the insured so the death benefit is kept out of the insured’s estate for estate tax purposes. Because the trust is irrevocable, the grantor cannot alter ownership or access the policy’s cash value, which keeps the death benefit from being included in the insured’s estate. Premiums are paid with gifts to the trust, making the trust the policy owner and the recipient of the death benefit. When the insured dies, the death benefit goes to the trust and can be distributed to beneficiaries to provide liquidity for taxes, debts, and other estate needs. This setup combines tax efficiency with liquidity for estate settlement. It’s not a revocable arrangement, it does not aim to pass proceeds to creditors, and the trust can own a life insurance policy.

An irrevocable life insurance trust is used to own a life insurance policy on the insured so the death benefit is kept out of the insured’s estate for estate tax purposes. Because the trust is irrevocable, the grantor cannot alter ownership or access the policy’s cash value, which keeps the death benefit from being included in the insured’s estate. Premiums are paid with gifts to the trust, making the trust the policy owner and the recipient of the death benefit. When the insured dies, the death benefit goes to the trust and can be distributed to beneficiaries to provide liquidity for taxes, debts, and other estate needs. This setup combines tax efficiency with liquidity for estate settlement. It’s not a revocable arrangement, it does not aim to pass proceeds to creditors, and the trust can own a life insurance policy.