The AE Team
Irrevocable Life Insurance Trust
- What is an Irrevocable Life Insurance Trust?
- Why use life insurance to pay estate taxes?
- How is life insurance “structured” to avoid taxes?
- Do you have to use an Irrevocable Trust to own life insurance?
- Why use an Irrevocable Trust?
- How does an Irrevocable Life Insurance Trust work?
- Are there any limits to the gifts made each year?
- What does the Trustee do with the gifts received?
- What happens when the Grantor (Insured) dies?
- What if Congress changes the exemption amounts?
How does an Irrevocable Life Insurance Trust Work?
The Grantor with the expected estate tax problem sets up the Trust naming a third party to act as Trustee and the Grantor establishes the beneficiaries of the Trust. The Grantor then makes gifts to the trust, enabling the Trustee to apply for and pay premiums on a Life Insurance Policy on the life of the Grantor.
You may also transfer (gift) one or more existing life insurance policies to the Trust. If transferring existing policies to the Trust, keep in mind that there are special rules for valuing these policies for gift tax purposes. These types of gifts in particular should be thoroughly reviewed by your attorney and/or tax advisor in advance of any such transfer.
Once the Trust is established, the Grantor will have no rights to or control over the Trust or the Life Insurance Policy, thus fulfilling the irrevocable requirement.