Who Owns a Life Insurance Trust?

Overview

An Irrevocable Life Insurance Trust, or ILIT, is designed to let you own a life insurance policy. By transferring ownership of the policy to a life insurance trust, the proceeds of the policy are not subject to estate tax at the time of death. Given that estate taxes are currently charged at a rate of 45 percent, a life insurance trust can save hundreds of thousands of dollars. This arrangement is not for everyone, however, since there are several tight regulations that many view as drawbacks. To place your policy in an ILIT and let the trust company own it, you must be in agreement with the following information detailed in sections one through five.

You Have Confidence in Your Beneficiary

An ILIT is typically a trust for someone who is confident that their spouse and/or children should be the beneficiary of the policy. Life insurance trusts require you to give up the right to change the policy beneficiary. There is absolutely no flexibility when it comes to changing family circumstances such as a divorce.

You Don't Need the Money

With a life insurance trust, the insured can not borrow against the policy. This means you must be sure the money can sit tight until after your death for use by your beneficiary.

You Will Live for at Least Three Years

If you transfer your policy to a life insurance trust and then die within three years of having made this arrangement, you will be considered the owner and as such the policy will be taxed. You should be confident in your ability to survive at least three years to set up an ILIT.

You Are Comfortable Choosing a Trustee

You cannot serve as the trustee of your life insurance trust, which means you must find or hire a third party. Many banks and trust companies offer reduced fees for life insurance trusts in exchange for acting as the trustee.

You Have Excess Cash to Cover Premiums

If your policy is not yet fully endowed, you must have enough excess cash lying around to cover the cost of premiums. If you don't have enough money, the money will be taken from the value of the life insurance policy after you die.