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Irrevocable Life Insurance Trusts (ILITs)

Irrevocable Life Insurance Trusts (ILITs)

The ILIT

An irrevocable life insurance trust (ILIT) is an estate planning tool generally used to provide liquidity that may be used to pay off estate taxes. It does this by keeping the proceeds from life insurance policies outside of the insured’s taxable estate. According to the IRS, if a policy owner can withdraw cash value from a policy, or change the policy beneficiary (among other powers), then the policy owner has “incidents of ownership” over the proceeds. If this is the case, the policy will be included in the owner’s taxable estate under IRC Section 2042. In other words, if you own a $1 million life insurance policy, your taxable estate is increased by $1 million, and so will be more vulnerable to estate taxes upon your death.

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