Legal Definitions - irrevocable life insurance trust (ILIT)

An irrevocablelife insurance trust (ILIT) is a type of trust that allows individuals to ensure that the benefits from a life insurance policy can avoid estate taxes and follow the interests of the insured. The ILIT must be irrevocable, meaning that the insured cannot change or undo the trust after its creation. This allows the premiums from the life insurance policy to avoid estate taxes.

For example, let's say that John has a life insurance policy worth $1 million. If John were to pass away, his beneficiaries would receive the $1 million from the policy. However, if John did not create an ILIT, the $1 million would be included in his estate and could be subject to estate taxes. By creating an ILIT, John can ensure that the $1 million from the policy will not be subject to estate taxes.

ILITs also allow the insured to choose a manager of assets and how the beneficiaries receive them like other trusts. For instance, John can instruct the trustee to prevent the beneficiaries from wasting the benefits or spread the assets among beneficiaries depending upon their needs. This gives John more control over how his assets are distributed after his death.

In summary, an ILIT is a useful tool for individuals who want to ensure that the benefits from a life insurance policy can avoid estate taxes and follow their wishes. By creating an ILIT, individuals can have more control over how their assets are distributed after their death.