What is a Life Insurance Trust (ILIT)?

A life insurance trust (ILIT) is a legal agreement where a life insurance policy is placed into a trust, removing it from the grantor's estate to provide asset protection, estate tax benefits, and control over the distribution of proceeds. An ILIT requires a grantor, trustees, and beneficiaries to work correctly.

How to Set Up a Life Insurance Trust (ILIT)

To set up a life insurance trust or ILIT, you must determine who you’d like to be involved. You’ll have to choose who the grantor, trustees and beneficiaries are. We recommend working with a financial or estate planner to iron out the details in your irrevocable life insurance trust.

Irrevocable Life Insurance Trust (ILIT)

What is an Irrevocable Life Insurance Trust?

Life insurance can help provide financial protection for loved ones who depend on you. An irrevocable life insurance trust (ILIT) allows you to place your life insurance policy into a trust, which may help keep the death benefit outside your taxable estate and offer other asset protection benefits.¹ While Aflac doesn’t set up ILITs, you may be able to hold an Aflac term or whole life insurance policy in one. Read on to learn how ILIT life insurance works and when an ILIT trust may be worth considering.

3 min. read

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Key Takeaways

An ILIT places a life insurance plan into a trust, effectively removing it from a grantor's estate.²
An ILIT trust offers several advantages, including greater asset protection, tax benefits and control over how you distribute your policy's death benefit.³
Aflac doesn't set up ILITs, but you may be able to build an ILIT into our term life or whole life insurance plans.

What is an ILIT and how does it work?

An ILIT is a legal agreement that places a life insurance policy into a trust, removing it from the grantor’s estate. This agreement usually involves three main parties:

Grantor: The person who creates and funds the trust and typically determines the trustee and beneficiaries.
Trustee: The person or organization that manages the trust, handles its administration and pays the policy premiums.
Beneficiaries: The people or organizations that receive the trust assets after the grantor passes away.

Since ILITs are irrevocable, the grantor generally can't change the trust terms or take the policy back without meeting strict legal requirements.⁴ As a result, it's a good idea to consult with an estate attorney before establishing one.

How does life insurance work?

Before setting up an ILIT, it’s important to understand how life insurance works. These policies allow you to choose your beneficiaries, who are the people who will receive the death benefit if you pass away while your coverage is still active.

The specific features of your policy depend on whether you choose term vs whole life insurance: ⁵

Term life insurance provides coverage for a set period, such as 10, 20 or 30 years, and only pays a death benefit if the insured person passes away during the term.
Whole life insurance is a form of permanent life insurance that provides lifelong coverage as long as policy premiums are paid and may also include a cash value component that grows over time.

Is life insurance taxable?

Life insurance proceeds are generally not taxable for beneficiaries, though there are some exceptions.⁶ For example, if the policyholder still owns the policy at the time of death rather than a trust, the death benefit may be included in the value of their estate.⁷ If the total estate exceeds applicable federal or state estate tax thresholds, a portion of the estate could be subject to estate taxes.⁸

An ILIT can help keep your life insurance policy’s death benefit outside of your estate, reducing its potential estate tax exposure.⁹

Note: Tax rules can be complex, so it’s important to speak with a tax professional or estate planning attorney before setting up an ILIT.

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What are the benefits of an ILIT?

An irrevocable life insurance trust can offer several potential benefits, depending on your situation. These benefits include:

Estate tax planning: Since the trust owns the policy, the death benefit can remain outside the grantor's taxable estate.
Asset protection: Assets held in an ILIT may receive protection from certain creditors, depending on state law and trust structure.¹⁰
Gift tax planning: An ILIT may help reduce potential gift tax consequences when transferring assets to beneficiaries.
Greater control over distributions: The trust can outline when and how beneficiaries receive funds, which may be helpful if beneficiaries are minors or need financial oversight.¹¹
Government benefit planning: An ILIT may help provide support for a beneficiary who receives Medicaid, disability benefits or other government assistance without disrupting their eligibility.¹²
Legacy planning: An ILIT can help transfer life insurance proceeds to future generations according to the grantor's wishes.¹³

ILITs vs. revocable life insurance trusts

An ILIT and a revocable life insurance trust (RLIT) can both help you manage your life insurance proceeds, but they work in different ways.

With an ILIT, the grantor gives up control over the trust assets. The trust usually can’t be changed or revoked easily, but it may offer stronger estate tax and asset protection against creditors.
With an RLIT, the grantor maintains more control and can usually change or revoke the trust. However, this flexibility may come with fewer estate tax and asset protection benefits.¹⁴

How to set up a life insurance trust

To set up an ILIT, you’ll typically need to:

Designate your trustees and beneficiaries
Work with an estate planning attorney to draft the trust
Decide whether the trust will buy a new life insurance policy or receive ownership of an existing one
Make sure your premiums are paid according to the trust terms

Learn more about Aflac life insurance

We don’t set up ILITs at Aflac, but you may be able to use an ILIT with one of our term or whole life insurance policies. Our comprehensive plans offer flexible coverage options to support your long-term financial planning goals.

Chat with an Aflac agent today to learn which life insurance policy makes sense for your coverage needs and get a quote.

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