Life Insurance Trust
An insurance trust is generally an irrevocable trust that owns insurance on the life of the grantor or grantor and spouse. The trust is designed to avoid federal estate taxation of the insurance proceeds on the deaths of the grantor or spouse. When premium payments or other gifts to the trust are made, the trust instrument grants specified beneficiaries Crummey withdrawal rights over the gifts so that they will qualify for the federal gift tax annual exclusion. These trusts would generally file a Form 1041 as a complex trust, if the $600 income requirement were met.
An Irrevocable Life Insurance Trust (ILIT) makes it possible to:
• Remove life insurance death benefits from the taxable estate on the death of the insured;
• Allow the grantor to control the disposition of the policy and the death proceeds;
• Utilize the client’s annual gift tax exclusion to pay the premiums;
• Provide significantly increased asset protection during lifetime; and
• Provide the grantor with indirect access to the cash value build-up inside trust-owned insurance policies.
By removing the death proceeds from the insured’s taxable estate, the amount actually passing to the beneficiaries is, in effect, doubled (assuming a 50% tax) because the tax is avoided. Viewed another way, the client could reduce premiums to half of what they’re currently paying and receive the same real coverage.