Trust Creation

• A trust arrangement is an arrangement where a person creates a trust agreement between the creator and another person, called a "trustee". The trustee holds legal title to property for the benefit of a third party, called a beneficiary. The trustee must manage the assets in the trust for the benefit of the beneficiary. The type of trust that is used to house life insurance policies is called an irrevocable life insurance trust, or "ILIT".
  
  

Significance

• An ILIT is also referred to as a life insurance trust. This trust removes the life insurance policy from your estate. When you die, the death benefit of the policy is included in the calculation to determine whether estate taxes will be due on your estate. Your death benefit may be quite large, thus adding significant value to your estate. The trust works around this issue without the beneficiaries losing their benefit from the policy.
  
  

Benefit

• The benefit of having a life insurance trust is that your beneficiary still gets the money from the policy, but your heirs do not have to use any portion of the death benefit to pay estate taxes on your estate after your death. The transfer of funds is incredibly efficient in this respect, leaving more of the death benefit in tact.
  
  

Disadvantage

• The disadvantage to using a life insurance trust is that your trust takes over ownership of the policy. You lose control over the policy. If you later want to change beneficiaries or borrow from any cash value in the policy, you'll be unable to do so since you don't own the policy any longer -- the trust does. With an irrevocable trust, you permanently give up ownership of the policy, so you should make sure that you want the trust to own the policy prior to making this commitment.