A “trust” is a legal arrangement in which a piece of property (such as money, real estate, an investment portfolio, or anything else) is held and controlled by one person, for the benefit of another.

There are many different types of trusts, and they can be set up under virtually any terms that the creator of the trust desires. Two major categories of trusts are “revocable” and “irrevocable” trusts.

A revocable trust is a trust whose terms can be amended, changed or revoked by the settlor (the person creating the trust) at any time. An irrevocable trust, by contrast, cannot be changed, amended, or revoked once its terms are locked in. This provides a good deal of security to the beneficiary, but it creates risk for the settlor, because it cannot be altered in response to changed circumstances.

An irrevocable life insurance trust, as the name implies, is a trust that owns a life insurance policy. If the person whose life is being insured is also the owner of the policy, their survivors will have to pay an estate tax on the proceeds of the insurance policy. However, if a trust is set up as the owner and beneficiary of the policy, with the person who is meant to benefit from the insurance policy set up as the beneficiary of the trust.

What Are Some Limitations for Irrevocable Life Insurance Trusts?

Once a trust of this type is set up, the beneficiary cannot be changed. By avoiding paying estate taxes on a life insurance policy, you have to make some tradeoffs. This is one of them. So, the decision to create an irrevocable life insurance trust is a big one, and should not be made lightly, since the beneficiary cannot be changed in response to changed family circumstances.

And unlike many other trusts, you cannot borrow money from an irrevocable life insurance trust. Furthermore, the insured cannot be the trustee, so you will have to find someone who is willing to serve as the trustee, or (more likely) hire someone to do it. The people best qualified to serve as trustees are accountants or lawyers, and their services do not come cheap.

However, many people, especially those with very large life insurance policies, find that the tax savings involved in an irrevocable life insurance trust are worth the expense and effort involved in setting it up.

How Can a Wills and Trusts Attorney Help?

To decide whether or not an irrevocable life insurance trust, you will need to speak with an estate lawyer or an accountant (possibly both) who specializes in estate planning. These are very complicated issues, and should not be undertaken without the assistance of a professional.