Which trust owns a life insurance policy?

• A. Revocable life insurance trust
• B. Generational life trust
• C. Irrevocable life insurance trust
• D. Family protection trust

Answer: (C)

The key idea is ownership for tax and control purposes. An irrevocable life insurance trust is the structure designed to own a life insurance policy. In an ILIT, the policy is owned by the trust rather than by the insured. The grantor funds the trust to pay premiums, and the trust (through its trustee) manages the policy and, on the insured’s death, collects the death benefit to pay beneficiaries. Because the policy is owned by a separate irrevocable entity, the death benefit generally does not become part of the insured’s estate for estate tax purposes, and it avoids probate to the extent the trust provisions are followed. This is why an ILIT is the standard vehicle for owning life insurance in estate planning.

Revocable trusts do not achieve this because the grantor retains control and can revoke or alter the trust, so the policy can remain includable in the estate. The other terms aren’t standard designs for owning a policy in estate planning and don’t carry the same tax-avoidance effect.