Definition of "Irrevocable life insurance trust"
Estate planning device used so that any life insurance policies that are owned by and paid to the trust will avoid estate tax upon the death of the insured, and, upon the death of the insured's spouse, estate taxes will be avoided as well. The requirement of this trust are: it must be irrevocable; and no distributions of the trust's principal or income can be made to the insured. All income generated by the trust must be accumulated and then distributed along with the trust's principal to the trust's beneficiary (s). The methods of operation of this trust could include the following forms:
- Trustee (insured's spouse) has the right to distribute income generated by the trust as well as the principal of the trust to the insured'sspouse as long as the insured lives. The trustee also has the right to borrow on the CASH VALUE of the life insurance policies on the lifeof the insured owned by the trust and then distribute the funds so obtained to the insured's spouse as long as the insured is alive.
- Trustee (cannot be insured) has the right to distribute income generated by the trust and/or principal of the trust to the insured. Thetrustee also has the right to borrow on the cash value of the life insurance policies on the life of the insured owned by the trust andthen distribute the funds so obtained to the insured.
- SPLIT DOLLAR LIFE INSURANCE policy is established within the trust with the insured's spouse having ownership rights to the cash valuepart of the split dollar policy and the trust having ownership rights to the death benefit minus the cash value. Through this mechanism,the insured's spouse has access to the cash value while the insured is alive. Upon the death of the insured and insured's spouse, theamount of the death benefit minus the cash value will not be subject to estate tax.
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