Irrevocable Life Insurance Trusts: The benefits of creating an (ILIT) Irrevocable Life Insurance Trust is that, unlike a traditional insurance policy that is part of your estate and subject to tax, the ILIT is separate from your estates. Therefore, the Trust itself is not subject to estate taxes and can be earmarked to pay all or parts of your estate’s tax liability following your death.
There are two ways you can go about to set up an ILIT: (1) you can transfer your existing life insurance policy to an ILIT, or (2) purchase a new policy through the ILIT. It is beneficial to note that an ILIT is best to allow the Trustee to acquire a new policy because transferring an existing policy will trigger a tax rule that if you decease within three years from the date of transfer, your insurance policy will be part of your estate.
For married couples, both spouses can be insured for a lesser costs, and pays benefits only after the second spouse becomes deceased.