Co-Founder, TermInsuranceBrokers.com, Goldenzweig Financial Group, Las Vegas, Nevada
There are many scenarios when the use of an irrevocable life insurance trust can be helpful. As the name says, it's an irrevocable trust. Once the grantor contributes an item to the trust (e.g. life insurance death benefits), they cannot make any changes to the terms of the trust or take anything back out of it.
It's commonly used for estate planning purposes. When an ILIT is the owner and beneficiary of a life insurance policy, the death benefits won't be included in the calculation of the gross estate of the insured - when life insurance is paid to an individual, they are included in the insured's taxable estate.
Another common scenario is to control how proceeds are distributed to minors, or in some cases a financially irresponsible adult. For example, you have an individual who is not yet a legal adult and stands to inherit a substantial amount of money from the death of the insured (e.g. parent). An ILIT can be set up to have a percentage paid out at age 21, then another percentage at age 25, and the rest at age 30 (or whatever alternate payout structure is desired when the ILIT is set up).
An Irrevocable Life Insurance Trust takes the value of the policy out of the estate of the policy owner, and makes the trust the owner of the policy. So you may want to use an ILIT when it is so important to you to protect the value of that policy, that you are willing to turn it over to someone else to control. Some times when this might be appropriate are when your estate goes over the exempted limit for inheritance or estate taxes when the life insurance proceeds are added into the value of your estate, or if you want to protect your policy from paying nursing home costs (but the ILIT would have to be set up years ahead of that event).
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It's commonly used for estate planning purposes. When an ILIT is the owner and beneficiary of a life insurance policy, the death benefits won't be included in the calculation of the gross estate of the insured - when life insurance is paid to an individual, they are included in the insured's taxable estate.
Another common scenario is to control how proceeds are distributed to minors, or in some cases a financially irresponsible adult. For example, you have an individual who is not yet a legal adult and stands to inherit a substantial amount of money from the death of the insured (e.g. parent). An ILIT can be set up to have a percentage paid out at age 21, then another percentage at age 25, and the rest at age 30 (or whatever alternate payout structure is desired when the ILIT is set up).