What is an Irrevocable Life Insurance Trust?
An irrevocable life insurance trust is an estate planning tool that allows for the possible exclusion of life insurance proceeds from the estate tax by acting as both the owner and beneficiary of life insurance policies. With the recent tax changes this is less of a concern for many people as the estate tax exemption is presently $11 million for individuals and $22 million for married couples (through 2025 at this time). However, this could very well change at some point in the future and it is recommended to consult an estate planning professional with knowledge of tax and estate planning matters for your specific circumstances.
How Does it Work?
A typical Life Insurance Policy is owned by the individual who purchases the policy, passes tax free to the beneficiary upon the passing of the owner, but the full amount is included in the owner’s estate (possibly triggering tax consequences if the amount is high enough or the overall estate is large enough to trigger estate tax). With an Irrevocable Life Insurance Trust, an Irrevocable Trust is created (meaning it cannot be changed/revoked or amended) to purchase/own the policy on the person’s life (instead of the owner purchasing/owning a policy on their own life). The trust document would outline an independent individual to run the trust and therefore maintain and pay for the insurance policy (not the one whose life is insured). Money is typically gifted from the person whose life is insured to the trust, so that the person running the trust may pay the insurance premiums to keep the policy in effect. Upon the insured persons passing the amount of the insurance still passes to the beneficiary tax free, but the policy amount is no longer owned by the insured person and thus is not included in their estate. Therefore if it were a $2 million term life insurance policy this $2 million would not be considered an asset of the deceased individual and would not be listed as part of their assets for purposes of calculating whether estate tax is owed.