Life insurance proceeds for which you have any "incidents of ownership" (policies you can borrow against, assign, or cancel, or for which you can revoke an assignment, or name or change the beneficiary) are included in your Taxable Estate. As a result, the proceeds of the life insurance may be subject to Federal Gift & Estate Tax rates over the Applicable Exclusion Amount. An ILIT will protect the proceeds of your life insurance from Federal Gift & Estate tax liability. Very simply, an ILIT owns your insurance policies for you. And since you don't personally own the insurance, it will not be included in your Taxable Estate, if the ILIT is established properly. 

Proceeds of the Insurance. Once your annual premiums for the insurance are transferred to the ILIT, the Trustee owns the policy. Accordingly, the proceeds of the policy will not be included in your Taxable Estate.

Legacy for Your Survivor. A properly structured ILIT can be drafted to create a Support Trust for your surviving spouse (for health, education, support or maintenance). Because the assets in the ILIT are not in your surviving spouse's estate, the proceeds will not be subject to Federal Gift & Estate taxation in your survivor's estate.

Legacy for Your Children. After the life of your immediate survivor, the ILIT can be drafted to continue in existence as a Support Trust to provide for your children (for health, education, support or maintenance). Because the assets in the ILIT are not in your children's estate, the proceeds will not be subject to Gift & Estate Taxation in your children's estate.

NOTE: Setting up an ILIT that properly coordinates the Annual Exclusion, the Applicable Exclusion Amount requires a technical understanding of Gift & Estate Tax law and should be drafted by a qualified attorney.