Irrevocable Life Insurance Trusts

Of the various types of trusts, this one is concerned with wealth generated after death. Ordinarily, the face value of life insurance is included in the taxable estate of the owner of the policy. This can represent a significant source of estate taxes.

However, you can create a special type of trust that eliminates estate taxes on the life insurance benefits because the trust, and not you, will be deemed to be the owner of the policy.

It is usually desirable to establish the life insurance trust first, and then have the trust purchase the policy in its own name. The trustor funds the trust, which in turn, purchases the policy in its own name, and pays the policy's premium against its own account. An independent trustee is absolutely required in this case.

It is possible to transfer an existing life insurance policy to such a trust. For example, where the trustor is older or has health problems that make a new life insurance policy cost-prohibitive. However, caution must be exercised so that the trustor irrevocably relinquishes to the trust absolutely all control over the policy. An estate planning attorney can ensure this is done properly.

The idea is that the trust takes over ownership of the policy. The trustor then makes contributions to the trust, which, in turn, uses the contributions to pay the policy's premium against its own account.