Irrevocable Life Insurance Trusts ("ILIT")

Previously, I posed about Life Insurance Trusts (“ILITs”) and how they are often used in conjunction with Revocable Living Trusts. In that same post, I briefly mentioned ILITs without delving into detail. Let’s do that now.
Pursuant to Internal Revenue Code Section 2038, property of a revocable trust will be included in the Settlor’s estate, including the value of any insurance proceeds paid on policies owned or controlled by the trustee of that trust. Accordingly, making the beneficiary of a life insurance policy your revocable living trust does not abate estate tax consequences. Further, both the cash value of the life insurance policy (if any) and death benefit will also be within the reach of creditors.
An ILIT addresses both of these problems. By making the trust irrevocable, the cash value is no longer in the insured’s possession and cannot be accessed by creditors. Moreover, the insurance policy’s death proceeds are removed from an estate (thus excluding it from estate tax calculations), while also — if properly drafted — meeting the needs of the estate.
There are cons, though. An ILIT is, as you guessed, irrevocable and thus un-amendable (except by Court Petition: see Trust Modifications by Missouri Courts). Management can also present difficulties. Because it is by its nature irrevocable (and thus out of an estate’s possession), it is a separate entity that requires its own taxpayer ID number and annual income tax returns (thus upping your accounting bill). Your legal bill will also likely go up because drafting an irrevocable trust is much more difficult, particularly since the language in the Trust spelling out how the Insurance is handled needs to be very precise. Significant care also needs to be given so as to ensure that the irrevocable life insurance trust is eligible for the annual gift tax exclusion (if handled incorrectly, beneficiaries could be on the hook for estate tax consequences).

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