What is a Life Insurance Trust?

A life insurance trust is a legal arrangement where a trust is created to own a life insurance policy. The trust is the beneficiary of the policy, and upon the insured person’s death, the proceeds are paid into the trust for distribution according to its terms.

What is a Life Insurance Trust?

Therefore, if you have trust in your life insurance quote, your estate will not be part of the death benefit when you die, and it will also help your beneficiaries escape estate taxes. However, there are some benefits and drawbacks that are involved with this process, and we will learn about them as we explore further into this content.

Types of Life Insurance Trusts

There are two types of life insurance trusts. We have the revocable life insurance trust and the irrevocable life insurance trust.

As for the revocable life insurance trust, this allows the insured to be in charge of the trust during their lifetime. In other words, you can make changes if you want and terminate the trust completely before the time of your death.

While irrevocable life insurance, also known as ILIT, is a permanent procedure, it also regulates and restricts control. Therefore, as the insured, you must assign a trustee to manage and handle the trust as well as its proceeds, which cannot be altered once it is set.

How Does It Work?

Life insurance trusts are designed in such a way that the insured or policyholder has no control over the policy, its revenue, or its yields. Instead, the policyholder sets up the trust to get possession of the policy and make someone else the independent trustee.

Although a life insurance trust restricts your long-term control, you are accountable for how the trust pays the life insurance premiums, who is in control of the trust, and who receives the life insurance death benefit. How the ILIT also makes payments to the beneficiary upon your death is also your responsibility.

Advantages and Disadvantages

There are different reasons why you should fund a trust and why you shouldn’t. In this part of this blog post, you will learn about the advantages and disadvantages of funding a trust with life insurance.


  • Asset protection.
  • Estate tax planning.
  • Preventing probate.


  • Funding and maintenance costs.
  • Gift tax implications.
  • Loss of control.

How to Set Up a Trust for Life Insurance

Here is the procedure that you need to follow if you are setting up a trust for life insurance:

  • Find out the type and purpose of trust.
  • Select your trustees and beneficiaries.
  • Create a trust document.
  • Finance the trust.
  • Abide by the legal requirements.
  • Go through and update the trust document when necessary.

Find Out the Type and Purpose of Trust

The first step to setting up a trust for life insurance is to determine the type and purpose of the trust. As mentioned earlier, there are two types of life insurance trusts. They are either revocable or irrevocable. Revocable trusts do not come with too many tax benefits, so you have control over making changes in the future. On the other hand, irrevocable trusts require you to renounce or give up control to a trustee.

Select your Trustees and Beneficiaries

Next, select your trustees and beneficiaries. Besides, if you want to set up an irrevocable trust, you will have to appoint a trustee. As for the beneficiaries, they are the ones who will get the proceeds from the trust after you pass away.

Create a Trust Document

Drafting or creating a trust document is possible if you partner with an experienced estate lawyer. They will assist you in making sure that your trust meets all the required legal requirements and carries out procedures successfully.

Finance the Trust

Do your research on the type of policy you want to buy and how much life insurance you need before funding or financing a life insurance trust. If you are finding it difficult to determine how much life insurance to purchase, your family’s current and future are major factors.

Abide by the Legal Requirements

Revocable life insurance trusts are simple to set up and have fewer legal requirements. On the other hand, irrevocable trusts are subject to some legal requirements and need to be set up to be eligible for tax exemptions.

Go Through and Update the Trust Document When Necessary

To repeat, irrevocable life insurance trusts are unchangeable after they have been set. So, you need to go through the documents to make sure that the beneficiaries and trustees are adhering to the instructions given and that the premiums are being paid for.

Alternatives to Funding a Trust with Life Insurance

Did you know that life insurance is not the only way you can fund a trust? Here are some of the alternatives to trust funding with life insurance:

  • Business interests
  • Cash
  • Investments
  • Art and other valuable collectibles
  • Real estate
  • Personal property

So, if you would like to use any of these to fund a trust, you are more than welcome to do so.


Why would someone create a Life Insurance Trust?

There are several reasons to establish ILIT, including:

  • Estate Planning: It can help minimize estate taxes and provide liquidity to cover estate expenses.
  • Asset Protection: Assets held in a trust are typically shielded from creditors.
  • Control: The trust creator can dictate how the insurance proceeds are distributed among beneficiaries.
  • Privacy: Trust assets and distributions are often kept private, unlike assets passed through a will, which may go through probate and become public records.

Who can create ILIT?

Generally, anyone can create an ILIT, provided they have an insurable interest in the insured person’s life and meet any legal requirements for establishing a trust in their jurisdiction.

Who can be the trustee of a life insurance trust?

The trustee of an ILIT is usually a trusted individual, financial institution, or professional trustee. It’s important to choose someone who is capable of managing trust assets and fulfilling fiduciary duties.

Can I change the terms of life insurance trusts?

Depending on the trust’s provisions and applicable laws, the terms of ILIT may be amendable or revocable by the trust creator during their lifetime. After the trust creator’s death, the terms typically become irrevocable.

Do life insurance trusts have tax implications?

Life Insurance Trusts may have tax implications, including potential estate taxes, gift taxes, and income taxes. It’s essential to consult with a qualified tax professional or estate planning attorney to understand the tax consequences specific to your situation.

What happens if the insured person outlives the life insurance policy?

If the insured person outlives the life insurance policy, there may be no death benefit payable to the trust. In such cases, the trust assets, including any premiums paid, would remain in the trust and be managed according to its terms.

Is ILIT right for everyone?

Life Insurance Trusts can be valuable estate planning tools for many individuals, but they’re not suitable for everyone. Factors such as estate size, tax implications, and specific goals should be carefully considered before establishing an ILIT. Consulting with a qualified estate planning professional can help determine if it’s the right strategy for you.

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