Using an Irrevocable Life Insurance Trust in Estate Planning?

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Basic estate planning is a process that guarantees your final property and health care wishes are carried out and ensures that your heirs are provided for in exactly the way that you desire. If you are like most people, you want to make sure that your assets do not get squandered after your death and you certainly don’t want the Federal Estate Tax to erode your estate and rob your heirs of the fruits of your labor. An irrevocable life insurance trust (ILIT) is one of the best tools you can use to pass your estate to your heirs intact and to minimize potential estate taxes.

What is an Irrevocable Life Insurance Trust? *

A trust is a legal document that is designed to hold property or assets of an individual (Grantor) or family and is managed by an individual or entity (Trustee) for the benefit of another individual or group of individuals (Beneficiary). An irrevocable trust is a trust that once created, generally cannot be modified or terminated by the Grantor. In other words, once you transfer assets into an irrevocable trust, you effectively remove all rights of ownership of the assets of the trust.

An irrevocable life insurance trust (ILIT) is an estate panning vehicle for effectively reducing estate taxes and using life insurance owned by the trust to pay any estate tax due. Income producing assets can be transferred into the ILIT with the express purpose on generating cash to pay the premiums on a life insurance policy owned by the ILIT. The ILIT then purchases a life insurance policy on the life of the Grantor(s) with the ILIT as the beneficiary. Once the Grantor(s) pass away, the estate tax then becomes payable. The life insurance policy proceeds (which are not includable in the Grantor’s estate) are then paid to the ILIT tax free. The Trustee, on behalf of the trust, then writes a check to the Federal Government for the balance of the estate tax due and the remaining estate assets pass to the named beneficiaries in tact.

Parties to an Irrevocable Life Insurance Trust

An irrevocable life insurance trust has three main parties: the Grantor, the Trustee and the Beneficiary.

Grantor – The Grantor is the person or persons that create the trust for the purpose of removing assets from their estate.

Trustee – The Trustee is the person or entity that is established to manage and distribute the trust assets according to the trust documents. Trustees are usually children of the Grantor but can also be an attorney or other trusted advisor.

Beneficiary – The Beneficiary(s) are those who are to receive the benefits of the ILIT according to the stipulations established by the Grantor in the trust documents.

How Does an ILIT Work?

At the outset, the Grantor establishes the ILIT with an attorney. In this beginning stage, all of the Grantor’s wishes and desires are discussed and included in the trust document. The Grantor must also select a Trustee to manage the trust assets and specify the limitations placed upon the Trustee. These guidelines may include the timing and method for distribution of trust assets, types of investments that can be made within the trust and naming successor trustees. Finally, the Grantor identifies the Beneficiary(s) of the trust assets.

Once the ILIT is created and the provisions established, the Grantor can then transfer assets to the trust. The assets can be either cash or property. In many cases, the Grantor(s) will make annual gifts (cash) to the trust that effectively reduces their estate tax exposure. As long as these “gifts” qualify for the annual gift tax exclusion, these transfers are not taxable *

Once the irrevocable life insurance trust is “funded”, the trustee, on behalf of the ILIT, applies for and purchases a life insurance policy on the life or lives of the Grantor and the Grantor’s spouse. The most common life insurance policy purchased in an ILIT is a second-to-die or survivorship life insurance policy. Commonly referred to as joint life insurance, a second-to-die life insurance policy is the perfect vehicle for providing liquidity to pay estate taxes because it pays out at the exact time the estate tax bill comes due.

Finally, when the trustee receives the “gifts” on behalf of the ILIT, he or she must notify the trust beneficiaries as they often have withdrawal rights. The beneficiaries will normally decline to take any “gifted” funds from the ILIT and the money is then used to pay the premiums for the life insurance policy that is owned by the trust.

What Type of Life Insurance Policy Should You Use in Your ILIT?

The type of life insurance policy that you use in your irrevocable trust will depend upon several factors including your marital status as well as your age and health.

Since estate taxes are only due when your estate passes to the next generation, a joint life or second-to-die life insurance policy is in most cases the best choice. In other words, if you are married, estate taxes are not payable until both you and your spouse pass away. The benefits of purchasing a joint or last-to-die insurance policy are that it covers 2 lives (you and your spouse) and in nearly every case it is cheaper than an individual policy. Since funds are not needed until the second death, the survivorship policy makes the most sense as it is more cost effective and provides a payout at the exact time the funds are needed.

If you are single, you must consider an individual life insurance policy as a second-to-die policy is only available for couples and must have 2 insured’s. With that in mind, your best option, in most cases, will be a guaranteed universal life insurance policy. These policies are perfect because they are priced like term life insurance but have a death benefit that is guaranteed for your lifetime. Since cash value is not a concern, you can save substantial amounts of money by using guaranteed universal life instead of traditional whole life insurance. Just make sure that your policy offers the guarantees!

For more detailed information see, using life insurance to pay estate taxes.


Establishing and funding an irrevocable life insurance trust (ILIT) is one of the smartest estate planning strategies for paying the federal estate tax. A very common strategy with ILIT’s, is to use your annual gift tax exclusion to effectively remove assets from your estate and the trustee can then use the funds to purchase a life insurance policy for the sole purpose to pay your federal estate tax bill. If you are married, second-to-die life insurance is usually the preferred type of policy as it is the most cost effective and provides the funds when needed. On the other hand, if you are single, a guaranteed universal life insurance policy is likely the most affordable and attractive option. For more information on using irrevocable life insurance trusts in estate planning, contact MEG Financial now at (877) 583-3955. You can also request an instant estate planning life insurance quote right from this website.

* The above trust and tax information is for information purposes only and is provided to explain the general basics of irrevocable life insurance trusts and using life insurance to pay estate taxes. Any individual doing estates planning should consult with their own independent advisor that understands their particular legal and tax circumstances. This information is not intended to be tax or legal advice.

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