In the context of estate planning, what is the primary advantage of establishing an irrevocable life insurance trust (ILIT) over simply owning a life insurance policy outright?

The primary advantage of establishing an irrevocable life insurance trust (ILIT) over owning a life insurance policy outright is the potential to remove the life insurance proceeds from the taxable estate, thereby reducing estate taxes. When an individual owns a life insurance policy, the death benefit is generally included in their gross estate, which is subject to federal estate taxes if the estate's value exceeds the estate tax exemption threshold. By transferring ownership of the life insurance policy to an ILIT, the policy is no longer considered part of the individual's estate, provided the transfer occurs more than three years before death. The ILIT, as the policy owner, receives the death benefit, and these funds can then be used to provide liquidity to the estate, pay estate taxes, or provide financial support to beneficiaries, all without being subject to estate tax. The ILIT provides estate tax benefits, assuming certain conditions are met, such as the trust being properly structured and administered and the grantor relinquishing control over the policy. An ILIT does involve complex legal considerations, including gift tax implications if the trust is funded with contributions exceeding the annual gift tax exclusion.