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 Oregon, a life insurance trust, commonly known as an irrevocable life insurance trust (ILIT), is a legal arrangement where life insurance policies are held by the trust, removing them from the grantor's estate. The grantor, who establishes the trust, relinquishes ownership and control over the policies, which are managed by a trustee for the benefit of the beneficiaries. 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, as per Section 2042 of the Internal Revenue Code (26 U.S.C. §2042). This section specifies that life insurance proceeds are included in the estate if they are payable to the estate or if the decedent had any incidents of ownership in the policies. Since laws and IRS rules can change, it is advisable for individuals in Oregon to consult with an estate planning attorney to ensure that their life insurance policies are structured in a way that meets their estate planning goals and complies with current regulations.