Trust-Owned Life Insurance (TOLI) is an irrevocable trust that is funded with life insurance. As a result, another name for it is an irrevocable life insurance trust (or ILIT). However, these trusts differ from ordinary trusts in that they have unique planning, drafting, and administration issues because life insurance is used as the main trust asset.
The main goal of a TOLI is to prevent the death benefit from being included in the insured’s taxable estate and, if they are married, their spouse’s taxable estate. In the event that the insured’s spouse is a noncitizen, a related goal is to avoid additional requirements needed to qualify a trust for the marital deduction by eliminating assets from the insured’s gross estate.
In funding the TOLI to pay policy premiums, it is often possible to avoid gift tax liability by taking advantage of the gift tax annual exclusion unless the available exclusions are being used for other transfers.
Another great advantage of a TOLI is that the trust can offer much more flexibility in terms of managing assets and eventually distributing an estate held in trust. In addition, the trust assets are entitled to a great deal of protection from unforeseen creditors.
