An ILIT is just an irrevocable trust that holds life insurance. An ILIT is used to make the death benefit escape estate tax. Life insurance already escapes income tax. Avoiding both tax systems can make life insurance a very attractive investment for the future of your family.
With the estate tax exemption just over $5 million and climbing, many would be client believe that estate planning and estate tax planning in particular are no longer needed. Though for many, the higher estate tax exemption means income tax planning can be focused on, including managing tax basis. Also, wise families understand that taxes are just one of the many ways family wealth can be confiscated. Other major risks, which can be far more devastating than taxes, include lawsuits, divorces, and market risk. Appropriate life insurance in a well-designed irrevocable trust can address and eliminate these risks.
One rather dramatic planning idea that could be excellent for many families is to use the $5+ million gift tax exemption by making a large gift to an ILIT that purchases a single premium life insurance policy. This could create a huge wealth transfer advantage for a family. If the gift is used to buy Life Insurance, then there is a huge leverage for the after tax wealth transfer.