What is the purpose of an irrevocable life insurance trust?

One Pacific Trust provides this through an ILIT, or Irrevocable Life Insurance Trust, which is one of the strategic estate-planning tools meant for the management and holding of life insurance policies outside of the estate of the insured. The primary purpose for including an ILIT in one's estate planning is to keep the proceeds from the life insurance outside of the grantor's taxable estate in order to minimize estate taxes. The following structure of the trust will offer significant tax benefits and, at the same time, ensure that the grantor's wishes regarding the distribution of the proceeds are met. Its benefits and purposes are described in detail below:

1. Estate Tax Reduction:

This is one of the main reasons anyone creates an irrevocable life insurance trust-to prevent the proceeds of the life insurance policy from being subjected to federal estate taxes. If a policy is owned by the insured, then typically the death benefit is included in the estate and can greatly increase the estate's taxable value. However, to the extent the policy is owned by an ILIT, the death benefit bypasses the estate and, therefore, does not increase the estate tax liability.

2. Asset Protection:

Because the assets inside the ILIT are not of the grantor, they are generally beyond the reach of creditors. This will help the death benefit be protected and preserved for the beneficiaries in case of financial difficulties on the part of the grantor during their lifetime.

3. Control Over Distribution:

An ILIT enables the grantor to maintain control over how the life insurance proceeds are distributed after the grantor has passed away. Terms of the trust can spell out when and how beneficiaries receive the funds-for example, letting minor children or beneficiaries who may not be financially responsible have their inheritance managed by a trustee until the time they reach a certain age or meet specific conditions.

4. Funding Estate Liquidity:

An irrevocable life insurance trust can provide the much-needed liquidity for an estate. The death benefit applied toward estate taxes, debts, and other financial obligations protects the beneficiaries from having to liquidate assets-such as a family business, property, or something else-that they may own.

Essentially, an irrevocable life insurance trust will protect life insurance proceeds from estate taxes, provide asset protection, controlled distribution to beneficiaries, and lend liquidity to an estate for easier settlement.