Life insurance exists for a reason: It's because people die.

But people don’t just die—they die at different ages, under different circumstances, with different amounts of accumulated wealth, and with different personal and family obligations, and so using life insurance successfully can be a complicated—and sometimes very complicated—wealth planning exercise.

The purpose of this article is to revisit that most common and popular of estate planning tools, the irrevocable life insurance trust (ILIT), and examine some of the ways that an ILIT can be used by individuals at various stages of life.

This article will address 1) life insurance, 2) the legal and mechanical aspects of implementing an ILIT, and 3) some specific “real life” case studies showing how life insurance purchased through an ILIT can achieve superior results.

Life Insurance Versus Death Insurance
Life insurance is a sophisticated financial product, with as many variations and permutations as there are creative insurance companies (there are many) and creative insurance planners (there are even more). But the universe of life insurance products can be distilled into two basic categories: life insurance and death insurance.

Death insurance is the traditional and widely understood purpose of life insurance: It provides a specified payout on the death of the insured. That can be a simple but very effective financial tool because, without belaboring the point, we will all eventually depart this vale of tears.

Life insurance, by contrast, is a description of the policies that meet actuarial standards as “life insurance” but are really designed to take advantage of the internal tax-free return that qualifying insurance products enjoy under the federal income tax laws. This type of insurance must necessarily have a “death” component, but its predominant emphasis and true purpose is to act as a tax-deferred and even tax-free investment vehicle that, oh, by the way, also includes a death benefit.

The full and flowery details that arise along the continuum of life insurance to death insurance are beyond the scope of this article, but the path is complicated and fascinating and will be the subject of a future article. What we have established, however, is that life insurance products can serve multiple simultaneous purposes, both to provide wealth and comfort for the still living and a legacy to heirs from the dearly departed.

Why I (Or We) Like ILITs
The Irrevocable Life Insurance Trust (ILIT) is a sophisticated and highly technical trust that combines in roughly equal measure complicated structuring under state trust law and sophisticated strategies under federal income tax law.

Sounds complicated already, doesn’t it?

The good news is that ILITs have been battle-tested in court cases, audits and private letter rulings, and therefore a capable estate planning attorney can draft this detailed and highly technical document with relative certainty and, dare we say, ease.

The benefit of an ILIT is that life insurance is owned outside the estate of the insured and therefore greatly enhances the after-estate tax wealth enjoyed by the insured’s spouse and/or heirs. The first “I” in ILIT is “irrevocable,” meaning that the transfer is intended to be permanent and non-recoverable—although innovations in the irrevocable trust in recent years have added some measure of flexibility to a formerly rigid and inflexible arrangement.

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