Blog Post

The Continued Usefulness of Life Insurance Trusts

Nathan R. Olansen

Despite the current estate tax laws which have eliminated the estate tax for the vast majority of people, one of the most popular estate tax planning vehicles (the Irrevocable Life Insurance Trust “ILIT”) still remains a corner piece of many estate plans. Few people realize all the benefits of an ILIT, and assume that without an estate tax liability, the ILIT has become obsolete – untrue.

A properly drafted life insurance trust not only keeps the life insurance proceeds from being taxed in your estate, it also prevents the life insurance proceeds from being taxed in the estate of your surviving spouse. The current estate tax law sunsets in 7 years, and there is no guarantee that the future estate tax exemption amount will be sufficient to exclude all of your surviving spouse’s assets from future estate tax. If properly drafted, the ILIT will also protect the trust beneficiaries (your surviving spouse and children) from their predators and creditors, and provides reliable, independent management for the trust assets. In addition, the ILIT can act as a safety net for you and your spouse if you unexpectedly encounter creditor problems while you are alive.

Here’s how the irrevocable life insurance trust works. You create an ILIT to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. If the ILIT is properly drafted, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion (currently $15,000 per year), so you won’t have to pay gift tax on the contributions.

While you are alive, the life insurance trust typically provides the trustee with the discretion to distribute principal and income to or for the benefit of your spouse and descendants. This allows you indirect access to the cash surrender value of the life insurance policies owned by the ILIT, and permits the trust to be terminated, if desired, despite its being irrevocable. On your death, the ILIT continues for the benefit of your spouse during his or her lifetime (children and other beneficiaries may also be included). Your spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of your descendants.

If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you. Please call us at (757) 687-8888 if you would like to discuss this further.

Written By Nathan R. Olansen


Nathan R. Olansen is a Shareholder in the law firm of Midgett Preti Olansen. His practice is focused on estate planning, probate and trust administration, IRS and state and local tax audit and tax collection cases, as well as individual and entity tax planning, asset protection and a variety of related transactional matters.

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