How does an Irrevocable Life Insurance Trust work?
Life insurance proceeds are normally received by beneficiaries after death of named insured.
Those insurance proceeds are received by beneficiaries free of income taxes. But they are countable as part of your taxable estate and therefore your loved ones can lose over forty percent of its value to federal estate taxes.
An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes.
There are options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.
This is for information only and not the providing of legal or tax services. You should always consult with a lawyer or income tax professional prior to setting up an irrevocable life insurance trust.