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 Louisiana, a life insurance trust, often referred to as an irrevocable life insurance trust (ILIT), is a legal arrangement where life insurance policies are held within a trust for the benefit of designated beneficiaries. The grantor, who establishes the trust, relinquishes ownership and control of the policies by placing them in the trust, which is managed by a trustee. This arrangement is designed to prevent the life insurance proceeds from being included in the grantor's gross estate, potentially avoiding estate taxes upon the grantor's death. According to Section 2042 of the Internal Revenue Code, life insurance proceeds may be included in the estate for tax purposes if they are payable to the estate or if the decedent had any incidents of ownership in the policy. It is important for individuals in Louisiana to consult with an attorney specializing in estate planning to ensure that the life insurance trust is properly structured to meet their goals and to stay current with any changes in laws or IRS rules that might affect the estate tax implications of life insurance policies.