Expert Q&A

What is an Irrevocable Life Insurance Trust?

How does it work exactly? What are the pros and cons of having one?

Related Topics: Life and Disability Insurance, Estate, Wills and Trusts, Financial Planning
Related Tags: Life Insurance, Trust
Skip Jacobs
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By Skip Jacobs - Abiding Wealth Advisors
Answered over 5 years ago

An irrevocable life insurance trust is a trust that contains a life insurance policy that has been placed there mainly for the purpose of shielding the death benefit from estate taxation. For existing life insurance policies, the policy must be in the trust for a period of at least 3 years prior to the insured’s death. If a new policy is placed in the trust, then there is no waiting period.
Issues to consider are:
1. Irrevocable means just that-it’s done-typically cannot be reversed.
2. The trust must be so drafted that the premiums payable on the policy will not be a taxable gift.
3. If an existing policy is placed into the trust, and the cash value is in excess of what can be transferred tax free, then it may be necessary to borrow the cash value from the policy prior to transfer.

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