Sunday, September 20, 2009
An Irrevocable Life Insurance Trust (ILIT) is a trust agreement in which a client may set up a Life Insurance Policy for beneficiaries without owning at and therefore without having the proceeds taxed it their estate.
Life Insurance Proceeds are normally not subject to federal income taxation. However, to the surprise of many, they are taxable under the federal estate tax, in the estate of one who has any "incident of ownership" (control) over the policy.
Often, a parent (or other client) wants to have some degree of "control" over the policy (who gets the proceeds and when they may be entitled to them). The ILIT allows a person to structure that.
Great care must be taken when setting these policies up, because they are irrevocable and therefore potentially inflexible. Careful drafting can help with the flexibility issues. There are are also some adminstrative requirements which make ILITs more onerous to maintain than often thought by clients and the professionals recommending them.