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 South Dakota, a life insurance trust, commonly referred to as an irrevocable life insurance trust (ILIT), is a legal mechanism where a grantor places one or more life insurance policies into a trust. This action removes the policies from the grantor's estate, potentially avoiding estate taxes upon the grantor's death. The trust is irrevocable, meaning the grantor relinquishes control and ownership of the policies and cannot revoke the trust. A trustee is appointed to manage the trust assets. According to Section 2042 of the Internal Revenue Code, life insurance proceeds are included in the grantor's gross estate if they are payable to the grantor's estate or if the grantor had any incidents of ownership in the policies at the time of death. To ensure that the life insurance policies are not included in the gross estate and to navigate the complexities of estate planning and tax law, it is advisable for individuals in South Dakota to consult with an attorney specializing in estate planning or a financial advisor.