What Is an Irrevocable Life Insurance Trust

While there are many different types of trusts, an irrevocable life insurance trust is a trust with the primary purpose of owning a life insurance policy in order to remove life insurance proceeds from the taxable estate and, as a result, avoid paying estate taxes on those proceeds.

While life insurance proceeds usually pass to the beneficiary free of federal income tax, they are subject to federal estate tax if included in the insured's estate at death.

If the estate exceeds a certain value, this means that a portion of the life insurance proceeds, if included in the taxable estate, could go to pay federal estate taxes instead of being available to the beneficiaries:

If you die in:  And the value of your estate exceeds:  Your taxable estate is subject to tax rates from/to:
2011                                   $5 million                                                            18%/35%

2012                                   $5 million                                                            18%/35%

2013 or later                        $1 million                                                            18%/55%*

* The 2010 Tax Relief Act provides a maximum 35% estate tax rate and a $5 million unified credit exemption equivalent, but "sunsets" at the end of 2012. This means that, without future Congressional action, the 2001 federal estate tax rules will be reinstated in 2013 with a maximum 55% estate tax rate and a $1 million unified credit exemption equivalent.

The objective of an irrevocable life insurance trust is to remove life insurance proceeds from the taxable estate so that the beneficiaries receive the entire amount, undiminished by estate taxes.


Ask Yourself…

• Do you want to protect the value of your estate from shrinkage due to the payment of estate settlement costs at your death?
• Do you want your family to have funds available to replace your earning power at your death?
• Do you want to make plans to provide for your children from a prior marriage at your death?
• Will your heirs need cash to continue operating a family business at your death?
• Do you want to make a substantial gift to charity, without depleting the size of your estate that passes to your heirs?
• Would you like the value of insurance proceeds on your life to pass to your heirs transfer tax free and outside of probate?

If the answer to one or more of these questions is "yes," then an irrevocable life insurance trust may be the solution.