Define: Irrevocable Life Insurance Trust (Ilit)

An Irrevocable Life Insurance Trust (ILIT) is a legal arrangement where a person establishes a trust to own a life insurance policy on their life. The trust is irrevocable, meaning that once it is created, the person cannot change or revoke it.

There are several reasons why someone might create an ILIT. One common reason is to remove the life insurance policy from their taxable estate, reducing potential estate taxes. Additionally, an ILIT can provide creditor protection for the life insurance proceeds and ensure that the policy proceeds are used for specific purposes, such as providing for the financial needs of beneficiaries.

When creating an ILIT, the person transfers ownership of their life insurance policy to the trust. The trust becomes the policy owner and beneficiary. The person can still pay the premiums, but they are considered gifts to the trust. Upon the person’s death, the trust receives the insurance proceeds and distributes them according to the trust’s terms.

Yes, you can be the trustee of your own ILIT. However, it is important to consider the potential estate tax implications of doing so. If you are the trustee and retain certain control over the trust, the life insurance proceeds may still be included in your taxable estate.

Generally, an ILIT is irrevocable, meaning that changes cannot be made once it is established. However, some flexibility can be built into the trust document, allowing for certain changes or modifications with the help of an attorney.

While an ILIT can provide various benefits, there are some potential downsides to consider. For example, once the policy is transferred to the trust, you no longer have direct control over it. Additionally, if you pass away within three years of transferring the policy, the proceeds may still be included in your taxable estate.

Yes, an ILIT can provide creditor protection for the life insurance proceeds. By transferring ownership of the policy to the trust, the proceeds are no longer considered part of your personal assets and may be shielded from creditors.

Yes, an ILIT can be structured to provide for the financial needs of minor children. The trust can specify how and when the life insurance proceeds should be distributed to ensure the children’s well-being and education.

Yes, an ILIT can be designed to benefit a charity. You can name a charitable organisation as a beneficiary of the trust, and upon your death, the life insurance proceeds will be distributed to the charity according to the trust’s terms.

While it is possible to create an ILIT without an attorney, it is highly recommended to seek legal advice. An attorney specializing in estate planning can help ensure that the trust is properly drafted, meets your specific needs, and complies with all applicable laws and regulations.