Overview
An ILIT owns and is the beneficiary of life insurance policies, removing the death benefit from your taxable estate. Without an ILIT, life insurance proceeds are included in your estate and potentially subject to estate tax at 40%. The trust receives the death benefit tax-free and distributes according to trust terms.
Best For
- Anyone with significant life insurance coverage
- Those with estates near or above the tax exemption
- Business owners using insurance for buy-sell agreements
- Parents wanting tax-free inheritance for children
Key Features
- ✓ Removes life insurance from taxable estate
- ✓ Death benefit passes 100% tax-free to trust
- ✓ Crummey notices for annual exclusion gifts
- ✓ Can provide liquidity for estate tax payment
- ✓ Spendthrift protection for beneficiaries
- ✓ Flexible distribution provisions
📊 Tax Benefits
- ✓ Death benefit excluded from taxable estate
- ✓ Annual premium gifts qualify for gift tax exclusion
- ✓ No income tax on death benefit proceeds
- ✓ Can fund estate tax obligations for other assets
- ✓ GST exemption allocation for dynasty planning
Considerations
- Must transfer existing policies (3-year lookback rule)
- New policies should be purchased by the trust
- Annual Crummey notices required for gift tax exclusion
- Cannot be the trustee of your own ILIT
- Irrevocable — cannot reclaim the policy