A life insurance trust—also known as an irrevocable life insurance trust (ILIT)—is a trust that consists of one or more life insurance policies that are payable to the trust upon the death of the insured.

A life insurance trust is usually created by a person (the grantor or settlor) who purchases one or more life insurance policies and places ownership of the policies in the trust, for the benefit of the named beneficiary or beneficiaries. As with other trusts, the trust will designate a trustee who will oversee and manage the trust assets (life insurance policies) during the grantor’s lifetime and following the grantor’s death.

Because a grantor who purchases life insurance policies and places them in a life insurance trust gives up ownership and control of the policies (and cannot revoke the trust) they may avoid having the life insurance policy or policies included in their gross estate at death—which may avoid estate tax liability on the value of the insurance policies.

Section 2042 of the Internal Revenue Code (26 U.S.C. §2042) states that the value of life insurance proceeds insuring your life are included in your gross estate if the proceeds are payable: (1) to your estate, either directly or indirectly, or (2) to named beneficiaries if you possessed any incidents of ownership in the policy at the time of your death.

Laws and Internal Revenue Service (IRS) interpretations may change at any time and a person who owns or is considering purchasing a life insurance policy may want to consult with an estate planning lawyer or financial advisor to try to avoid having the policy included in their gross estate at death.

In Rhode Island, an irrevocable life insurance trust (ILIT) is a legal tool used to exclude the proceeds of life insurance policies from the grantor's taxable estate. When a grantor establishes an ILIT, they transfer ownership of their life insurance policies into the trust, relinquishing control and ownership rights. This means the grantor cannot revoke the trust or change its terms. The trust is managed by a trustee for the benefit of the named beneficiaries. The primary advantage of an ILIT in estate planning is to avoid estate taxes on the insurance proceeds, as outlined in Section 2042 of the Internal Revenue Code (26 U.S.C. §2042), which includes life insurance proceeds in the grantor's gross estate if they retained incidents of ownership at the time of death. It is important for individuals in Rhode Island to consult with an attorney specializing in estate planning to ensure that an ILIT is properly structured and to stay current with any changes in laws or IRS policies that might affect the estate tax implications of life insurance policies.