What is an Insurance Trust?

An irrevocable life insurance trust (an "ILIT") is an irrevocable trust created for the principal purpose of owning a life insurance policy. As with any other trust, the insurance trust is a contract between a grantor and a trustee to administer certain property, in this case an insurance contract, for the benefit of named beneficiaries. The insurance trust, like other irrevocable trusts, cannot be rescinded, amended, or modified in any way after it is created. Once the grantor contributes property to the trust, he cannot later reclaim ownership of the property or change the terms of the trust.

One of the primary reason executing a life insurance trust is estate tax considerations. If an ILIT is properly structured, the death benefits paid to the trust will be free from inclusion in the gross estate of the insured. In addition, the ILIT can also be structured so that the trust will provide benefits to the insured's surviving spouse without inclusion in the surviving spouse's gross estate either.

Procedure to Establish Life Insurance Trust

The following are suggested procedures to establish an insurance trust for purchase and ownership of a life insurance policy:

1. The need for the irrevocable trust is established.
2. Terms of the trust are designed including the establishment of beneficiaries and the choosing of both initial and successor trustees.
3. Medical examination procedures should be commenced. There is no need to draft a trust if clients are not insurable. The insured should not sign anything at this point other than in his or her capacity as insured (i.e., not as the owner or applicant).
4. Attorney drafts insurance trust.
5. Client and trustee sign insurance trust. The trustee should apply for employer identification number.
6. Trustee applies for life insurance and signs application as insurance owner. If the insurance company requires a check with application, the application should not be commenced until the following three steps are completed: (i) the grantor makes initial gift to the insurance trust to cover initial premium; (ii) a checking account is opened in the name of the trust; and (iii) the trustee notifies beneficiaries that a gift is being made to the trust and that they have rights of withdrawal. The demand notice should be given and the period for withdrawals allowed to lapse prior to payment of any premiums to the insurance company.
7. The Trustee completes the application and pays initial premium.