There are certain benefits to having a life insurance policy that you don't control.

What it is: An irrevocable life insurance trust is a legal entity that owns one or more life insurance policies. When the insured person dies, the trustee makes the life insurance claim and administers the money to heirs.

Why you'd want one: Since the trust owns the life insurance policy, the asset is not part of your estate. That means the payout is not subject to inheritance and estate taxes.

However, very few estates are subject to federal estate taxes. The current tax law exempts the first $11.2 million of an individual's estate. If you have a large estate, there are also state inheritance and estate taxes to be aware of. Here's a list of those state taxes from the Tax Foundation.

These amounts are exempt from federal estate tax for the 2018 tax year


Individuals $11.2 million
Couples $22.4 million

Types of life insurance used in an irrevocable life insurance trust: People generally use a permanent life insurance policy within a trust, such as whole life or universal life.

You could use a term life insurance policy within a trust, but that likely wouldn't make sense since you could outlive a term life policy and your heirs would get no payout.

If a couple wants to use a trust to keep money out of an estate, they typically purchase survivorship life insurance, also called a second-to-die policy. This type of policy insures two lives at once and pays out only when both spouses have died.

Planning the trust payout: You can decide how the trust is structured. For example, your heirs could get the full life insurance payout at once, or the trust could spread out payments over time. The trustee could also have the discretion to provide funds when needed; for example, if an heir needs money to start a business.

How to set it up: You'll need to sit down with an attorney to set up a trust and structure it properly. You'll need to know who your trustee(s) will be, who the heirs will be and the rules for the trustee for giving money to heirs.