An irrevocable insurance trust (ILIT) is most frequently used to change ownership of a life insurance policy from an individual to a trust. The trust would not be taxed as part of the creator’s gross taxable estate for estate tax purposes.
Life insurance can constitute a large proportion of an individual’s estate. By removing this policy from the taxable estate, the creator may decrease taxes imposed on his or her other assets, as well. Unlike the loss of control that accompanies the transfer of an investment account or house to an irrevocable trust, many individuals don’t experience that same loss with the transfer of a life insurance policy, especially term life insurance policies that have little value until they pass away.
Not every life insurance policy is suitable to be transferred to a trust, though. Policies with an investment component where the owner intends to make withdrawals from the investment to fund a college expense or retirement may not be suitable for trust ownership.