The ILIT is an irrevocable trust which holds assets outside of your estate. This will exempt these assets from estate taxes upon your death. An ILIT is often named as the owner and beneficiary of a life insurance policy. This will make certain that the insurance proceeds are passed to the beneficiaries without first being taxed. The ILIT produces the following benefits:
Who needs one? When you die, everything that is in your name and all those things that you control, are considered to be in your “taxable estate.” Federal taxes are due on all assets valued at over the applicable exclusion amount. In the case of a married couple with a tax saving A/B or “marital deduction” living trust, taxes are only due on assets valued at more than twice the applicable exclusion amount.
Your “taxable estate” includes the cash value of your life insurance death benefit if you are the owner or if you pay the premiums. You may establish an irrevocable life insurance trust to own your life insurance policies. Since the trust is irrevocable, and since you are not the trustee, the insurance proceeds are no longer considered a part of your taxable estate.
If your estate is approaching the estate tax limits, an irrevocable life insurance trust may reduce your estate taxes. With this trust, your life insurance proceeds will not be subject to any federal estate taxes at all.