An irrevocable life insurance trust is set up to own a life insurance policy with associated substantial tax savings.
In case the insured is the owner of the policy, the proceeds of the policy shall suffer estate tax when he dies. However, if the insured had transferred the ownership of the policy to such a trust, the proceeds are not liable to either estate tax or income tax. At the current rate of estate tax of 46% in the USA, tax savings through the vehicle of irrevocable life insurance trust is indeed significant.
However, in this connection many stringent terms and conditions have to be complied with.
The insured can neither change the beneficiary of the policy nor serve as a trustee on the trust. As such, he has to hire a trustee. Banks and trust companies render service as trustees in their professional capacity. Moreover the insured cannot borrow from the policy. In case he borrows money on the policy he will be considered as owner of the policy for the purpose of estate tax.
In case the insured dies within three years of transferring an existing life insurance policy to such trust, he will still be considered as owner of the policy, which will be included in the estate of the deceased for the levy of estate tax.
This mechanism of irrevocable life insurance trust takes off life insurance policy, which is a significant asset, from the scope of estate and consequently out of the estate tax net. At the same time the whole proceeds of life insurance go to the intended beneficiaries.
(More http://en.wikipedia.org/wiki/)
| 
