233 / What are some of the advantages of using an irrevocable life insurance trust?

An ILIT can present many advantages to individuals who possess significant amounts of life insurance. One of the primary benefits is that the ILIT strategy can help reduce estate tax liability, as discussed in Q 232, as it removes life insurance from the decedent’s gross estate. Further, the ILIT strategy may reduce the amount of insurance coverage needed by the insured, since his or her estate tax bill will be lowered due to funding through an ILIT.

Creating an ILIT also helps the insured protect the cash value of the life insurance policy from creditors. In an ILIT, the grantor no longer legally owns the assets or controls the trust. Due to this loss of ownership and control, a future creditor cannot satisfy a judgement against assets held in an ILIT.

Another advantage of an ILIT is that it can allow the grantor to control when, how and why the beneficiaries receive the proceeds of the life insurance policy. This is set out in the trust documents. Upon the insured’s death, the life insurance proceeds will pay to the trust. The trust documents will then detail the disbursement of the funds.