Transferring Whole Life Policy Ownership to a Trust: The ILIT Strategy
For high-net-worth individuals, using an Irrevocable Life Insurance Trust (ILIT) is a foundational strategy for advanced estate planning. The goal is to move the Permanent Life Insurance policy out of the insured’s estate to minimize or eliminate estate taxes on the death benefit.
How the ILIT Works
- **The Trust is the Owner:** The insured creates an ILIT (a legal entity) and names the trust as the owner and beneficiary of the Whole Life policy.
- **Premium Payments:** The insured gifts money to the trust each year (often using the annual gift tax exclusion) to pay the premiums.
- **Estate Exclusion:** Because the insured does not own the policy, the death benefit is not included in their taxable estate, ensuring the money passes to heirs income- and estate-tax-free.
The Three-Year Rule
A crucial rule is the **three-year rule**. If the insured dies within three years of transferring an *existing* policy into an ILIT, the IRS will include the death benefit in the taxable estate. Buying a new policy within the ILIT avoids this rule.
Disclaimer: This content is for informational purposes only and is not financial or legal advice. Creating and funding an ILIT requires the expertise of a specialized estate planning attorney.