Life insurance trusts (also referred to as irrevocable life insurance trusts (ILIT)) allow individuals to ensure the benefits from a life insurance policy can avoid estate taxes and implement the interests of insured. These trusts must be irrevocable, meaning the insured cannot change or undue the trust after its creation. This allows the benefits from the life insurance policy to avoid estate taxes. If the policy were not created under a life insurance trust, any insurance benefits plus other assets of the insured above the applicable exclusion amount could trigger both state and federal estate taxes. Life insurance trusts also allow the insured to choose a manager of assets and how the beneficiaries receive them like other trusts. So, the insured can instruct the trustee to do things like prevent the beneficiaries from wasting the benefits or spread the assets among beneficiaries depending upon their needs.
[Last updated in March of 2022 by the Wex Definitions Team]