Irrevocable Life Insurance Trust:
What is it?
An irrevocable life insurance trust (ILIT), sometimes referred to as a wealth replacement trust, is a trust that is funded, at least in part, by life insurance policies or proceeds. If properly implemented, an ILIT can help minimize estate taxes and provide a source of liquid funds to your estate for the payment of taxes, debts, and expenses.
Generally, assets you own at death are subject to federal estate tax. This includes life insurance policies and proceeds. Estates in excess of the applicable exclusion amount (in 2017, $5,490,000 plus any deceased spousal unused exclusion amount) may have to pay estate tax at rates as high as 40 percent. If you're an insured individual whose estate will have to pay estate tax, your family may receive less money from your life insurance than you originally planned for.
An ILIT can solve this problem, and may be especially appropriate if your estate would not have to pay estate taxes were it not for the inclusion of the policy proceeds.
Tip: Although this discussion concerns federal estate taxes only, an ILIT can also help minimize state death taxes.