When it comes to estate planning, a common tool to use is an irrevocable life insurance trust, commonly known as an ILIT. And sometimes you want to transfer a policy from one ILIT to another, and you may be wondering, how do you do that?

So when you’re using an ILIT, an irrevocable life insurance trust, the keyword there is irrevocable. And what does that mean? Well, that means basically the die is cast. Any assets in that trust have to stay in that trust until an event occurs.

But what happens if you have a life insurance policy owned by this ILIT?

Now, this is where things get a little interesting because there are only a few ways you can take money out of one trust and put it into another trust. Let’s say you have a life insurance policy with $310,000 of cash value. One of the ways that you can get that policy out of the trust is to exchange $310,000 of cash for the policy. So you’re just swapping assets, but now you can get the policy and the death benefit out of this trust and put it into the new trust. That’s all well and good, assuming you have $310,000 of assets. If you don’t have $310,000 of assets, what are your choices?

Well, real simply, you can freeze the policy and make it a paid up policy, which would probably reduce the death benefit. Now you can take whatever premiums you were putting towards that old policy in the old trust and put it into a new policy in the new trust. And then I would step back from that transaction and say, “am I making any progress?” Because, to me, it probably doesn’t make sense If you had a ten year old policy and now you’re going to take out a new policy in the new trust while you’re paying for a premium. When you’re ten years older, probably in your sixties or seventies, that premium is going to be significantly higher than the premium on the original policy. Again, what are you trying to accomplish?

These policies are actuarially designed to get better and better year after year, meaning the premiums are locked in. The cash value is growing, and the death benefit, assuming you earn dividends, is going to increase. If you were to transfer it to a new policy, or freeze it, or any of these other options, you’d be giving up a great deal of gain.

So let’s take a step back. What exactly is an ILIT? Well, an ILIT is a trust that lays out exactly what the grantor, the person designing the trust, wants to have happen to the assets that are going to fund it. It’s irrevocable, meaning it can’t be changed. It’s set in stone. So with that, the decisions that you make when you’re setting up this ILIT are important because in a sense they’re permanent. The control of the trust is in the hands of the trustee. 

But, because of the irrevocable nature of the trust, there are limitations as to even what the trustee can and cannot do. And that’s the point. Make sure you know what you want to have accomplished before you get into an irrevocable trust, because you’re limited, and your trustees are limited as to exactly what can happen down the road.

The trust is a blueprint of what can and can’t be done with the money and the funds within that trust.