When Life Insurance and Estate Planning Meet

Life insurance is often purchased to protect a family, provide liquidity, or support a long-term legacy plan. But when substantial assets are involved, who owns the policy can be just as important as the policy itself. That’s where an irrevocable life insurance trust (ILIT) may enter the conversation. An irrevocable life insurance trust, commonly called an ILIT, is one structure that may be considered when the ownership and distribution of policy proceeds need to be coordinated with an estate plan.

What Is an ILIT?

An ILIT is an irrevocable trust designed to own one or more life insurance policies and administer proceeds under the trust terms. A trustee, rather than the insured, controls the trust-owned policy. The trust document identifies the beneficiaries and sets the framework for administration and distributions.

The word ‘irrevocable’ is important. Creating or funding this type of trust can involve giving up control that an individual owner would otherwise have. That tradeoff should be evaluated with an estate-planning attorney before implementation.

Why Ownership Matters

Section 2042 generally includes life insurance proceeds in the insured’s gross estate when proceeds are payable to the executor or when the insured possesses incidents of ownership at death. An ILIT is often discussed because properly structured third-party ownership may help separate policy ownership from the insured. Whether that goal is achieved depends on the trust, policy, transfers, and actual administration.

The Three-Year Rule

Section 2035 can pull certain transferred interests back into the gross estate when a transfer or relinquishment occurs during the three-year period ending on the date of death and the property would otherwise have been included under Section 2042. This is one reason transferring an existing policy requires careful legal and tax review. The statute also contains a bona fide sale exception, but whether it applies depends on the facts.

How the Structure May Operate

Exact procedures depend on the trust and professional guidance. At a high level, the trust may own a policy, receive funds for premiums, and hold proceeds for beneficiaries under the trust terms. The trustee is responsible for following the document and handling required administration. The insured should not assume the arrangement can be treated like a personally owned policy.

When Might Someone Consider an ILIT?

An ILIT is not necessary for every life insurance policy owner. However, it may become part of a broader estate-planning discussion when individuals or families:

• Have a large estate and are concerned about how assets may transfer to beneficiaries.
• Want life insurance proceeds managed according to specific trust provisions.
• Wish to provide financial support for children, grandchildren, or other beneficiaries over time rather than through a lump-sum distribution.
• Own a closely held business and want additional liquidity available at death.
• Are exploring ways to coordinate life insurance ownership with broader legacy-planning goals.

Because trust design, tax rules, and ownership arrangements can vary significantly, an attorney and tax

professional should review the structure before any decisions are made.

The Bottom Line

For a comprehensive review of your personal situation, always consult with a legal advisor. Neither Cetera Wealth Services, LLC nor any of its representatives may give legal advice.