The typical purpose for an irrevocable life insurance trust (ILIT) is to remove the cash value and death benefit value from the estate of the insured person. If the insured has no control over the insurance policy, i.e. cannot revoke or change beneficiaries, etc. the law will not include the death benefits in his/her estate.
Historically the ILIT has been used for federal estate tax reduction. It can still be used for that, but with a $5.49 million federal estate tax exclusion, this is less applicable to most Americans. Oregonians however, still have to worry about Oregonâ€™s Estate Transfer tax. Depending on the size of the estate and the size of the life insurance, this can still be worth the cost of creating and maintaining an ILIT.
For those without a taxable estate, there can still be several useful reasons to consider an ILIT. An ILIT can also increase asset protection during a personâ€™s lifetime. For a business owner, an ILIT can equalize an inheritance to a child who has no interest in running the family business.
In the usual case, a person will create the trust, and then make tax exempt gifts to the trust to pay for premiums. Careful attention must be paid each time a premium is paid in order to make it qualify as a gift. This is a necessary piece to removing it from your estate. The trust then pays the premiums and the full amount can pass free of estate tax to your heirs. With a little additional planning, it can even pass to grandchildren free of federal generation skipping tax.
As with all irrevocable trusts, you must take care when making a decision like this. While the trust can not be undone, some flexibility can still be added into the trust. Talk to your legal and insurance professionals about this option.