Life Insurance Trusts: Navigating the Legal Landscape
Posted September 26, 2025
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Life insurance is a common instrument to provide for loved ones after one's passing. But when combined with the mechanics of a trust, it brings forth a sophisticated tool for estate planning: the life insurance trust. As with most legal instruments, the nitty-gritty of life insurance trusts can be intricate, and the laws governing them are subject to variation across states. Let's delve into the essence of life insurance trusts and why they matter.
What is a Life Insurance Trust?
A life insurance trust, also known as an irrevocable life insurance trust (ILIT), is a trust explicitly crafted to hold one or more life insurance policies. Upon the death of the insured, the life insurance policy is payable to the trust instead of directly to the named beneficiaries.
Key Components of an ILIT
Grantor/Settlor: This is the person who creates the trust. They purchase life insurance policies and transfer their ownership to the trust.
Trustee: This designated individual or entity is responsible for managing the life insurance policies within the trust according to the trust's terms.
Beneficiaries: The persons or entities who will eventually benefit from the trust assets (the life insurance proceeds) upon the death of the insured.
Advantages of an ILIT
The primary reason for establishing an ILIT is to prevent the life insurance policy's proceeds from being included in the grantor's gross estate at the time of death. This could lead to substantial savings on estate taxes.