What is an Irrevocable Life Insurance Trust?

A Life Insurance death benefit is going to be subject to estate tax which could reduce the amount available for your dependents. An Irrevocable Life Insurance Trust is a way to avoid this taxation.

An Irrevocable Life Insurance Trust is a form of Trust that is established for the purpose of owning a Life Insurance Policy. It is establish in much the same way as any other Trust. The first step of the process is determining the need for the Trust. This is usually done in consultation with your Insurance Agent and financial advisor. Once the need is determined, the conditions of the trust are established. This would include selection of beneficiaries and the selection of a primary and successor trustee.

The next step is to complete medical examinations and otherwise determine the insurability of the potential person that the policy is going to be covering. There is no need to proceed further if the client is not insurable. At this point in the process, the potential client should be careful to not sign anything that would declare himself to be either the applicant or the owner of the policy.

Once insurability is established, a lawyer can draft the Trust documents. Once the Trust has been established, the Trustee applies for the Insurance Policy and pays the initial premium payment. The Trust is the actual owner of the policy. This is an important point to understand. The client forfeits all control and ownership of the Policy. He also can not change his mind at a later date and change the conditions of the Trust. This is why it is called Irrevocable.

The client continues to make the premium payments by making taxable gifts to the Trust. The funds are then used to pay the premiums. If the client dies, the trustee makes sure that the death benefit is paid to the beneficiary according to the terms of the Trust. The death benefit would not be subject to any estate tax because it is not considered to be part of the deceased estate.

An Irrevocable Life Insurance Trust can be a valuable tool in estate planning. It is necessary to have the counsel and guidance of a lawyer or accountant who specializes in trusts and taxation to determine if this is a proper course of action for your personal financial needs.



Barry Waxler is a San Diego financial planner at UFCAmerica.com.