Irrevocable life insurance trust
An irrevocable life insurance trust, or ILIT, is a trust that owns a life insurance policy and receives its proceeds as beneficiary. The grantor cannot reclaim or redirect the policy or proceeds under the trust terms described in the practitioner material. For owners of businesses, real estate and private investments, the trust is discussed in connection with estate liquidity and with how proceeds are treated in the insured's taxable estate.
How it works
An ILIT owns the policy, and the trust is named as beneficiary.
The trust terms are irrevocable. For survivorship insurance held in an ILIT, practitioners describe the policy and proceeds as beyond the grantors' ability to reclaim or redirect.
Where it shows up for owners of businesses, real estate and private investments
An ILIT may provide liquidity for an estate that includes a business, real estate or private investments. Practitioner articles describe a trustee using proceeds to lend cash to the estate or buy estate assets, including in circumstances where liquidity is needed for taxes or debts.
Practitioners describe some insureds facing a possible federal estate tax problem as using an ILIT to own a policy, with the trust named as beneficiary. The trust's possible liquidity role is described as providing cash through a loan or asset purchase, on appropriate terms.
Points that are easy to confuse
Policy ownership and beneficiary designation are separate mechanics. Practitioner material describes the ILIT as owning the policy and the trust as its beneficiary, while the insured retaining incidents of ownership is identified as a condition relevant to estate inclusion.
Estate liquidity is a possible use of proceeds, not a description of who owns the estate assets. Practitioner articles describe lending cash to the estate or purchasing assets from it as possible trustee actions.
Common questions
Who owns the life insurance policy in an ILIT?
The trust owns the policy, and the trust is named as beneficiary in the practitioner description.
How can an ILIT provide liquidity to an estate?
Practitioner articles describe a trustee using policy proceeds to lend cash to the estate or buy estate assets on appropriate terms. The articles identify estate taxes or debts as possible liquidity needs. The trust's possible use of proceeds does not itself describe the ownership of assets already held by the estate.