A life insurance trust—also known as an irrevocable life insurance trust (ILIT)—is a trust that consists of one or more life insurance policies that are payable to the trust upon the death of the insured.

A life insurance trust is usually created by a person (the grantor or settlor) who purchases one or more life insurance policies and places ownership of the policies in the trust, for the benefit of the named beneficiary or beneficiaries. As with other trusts, the trust will designate a trustee who will oversee and manage the trust assets (life insurance policies) during the grantor’s lifetime and following the grantor’s death.

Because a grantor who purchases life insurance policies and places them in a life insurance trust gives up ownership and control of the policies (and cannot revoke the trust) they may avoid having the life insurance policy or policies included in their gross estate at death—which may avoid estate tax liability on the value of the insurance policies.

Section 2042 of the Internal Revenue Code (26 U.S.C. §2042) states that the value of life insurance proceeds insuring your life are included in your gross estate if the proceeds are payable: (1) to your estate, either directly or indirectly, or (2) to named beneficiaries if you possessed any incidents of ownership in the policy at the time of your death.

Laws and Internal Revenue Service (IRS) interpretations may change at any time and a person who owns or is considering purchasing a life insurance policy may want to consult with an estate planning lawyer or financial advisor to try to avoid having the policy included in their gross estate at death.

In Arkansas, a life insurance trust, commonly referred to as an irrevocable life insurance trust (ILIT), is a legal arrangement where life insurance policies are held by a trust, rather than an individual. The trust is irrevocable, meaning that once it is established and the life insurance policies are placed within it, the grantor relinquishes control and ownership over the policies. The trust names beneficiaries who will receive the benefits upon the death of the insured, and a trustee is appointed to manage the trust assets. The primary advantage of an ILIT is that it can help avoid the inclusion of the life insurance proceeds in the grantor's gross estate for estate tax purposes, as outlined in Section 2042 of the Internal Revenue Code (26 U.S.C. §2042). This can potentially lead to significant estate tax savings. However, the rules governing ILITs and estate taxes are complex and subject to change, so it is advisable for individuals to consult with an attorney specializing in estate planning to ensure compliance with current laws and to maximize the benefits of setting up a life insurance trust.