Irrevocable Life Insurance Trust
Although life insurance proceeds are generally exempt from income tax, they are not exempt from estate tax. The purpose of an Irrevocable Life Insurance Trust (ILIT) is to remove the proceeds of the life insurance on your life from your taxable estate so that the proceeds can pass tax free to your beneficiaries. In order to be effective, the trust must have specific provisions included. An existing life insurance policy transferred to a trust will be removed from your taxable estate once three years have lapsed subsequent to the transfer. However, any new policy can immediately be excluded from your taxable estate if the trust is the initial purchaser of that policy. This should be considered prior to applying for and purchasing any new insurance policies.