A chief advantage of using life insurance in any financial plan is that death benefits are not subject to income taxation. However, it is incorrect to say that life insurance is free from all taxation. In fact, life insurance owned by the decedent is included (at its death benefit value) as part of the decedent's estate for estate tax purposes. Since life insurance can represent a substantial portion of one's estate, taking steps to remove it from the estate is a common planning strategy.

The legal device most commonly used to remove life insurance from an individual's estate is the irrevocable life insurance trust (ILIT). The key to removing the value of life insurance from a client's estate is to remove any incidents of ownership in the policy, and that's what an ILIT does. A policy that is owned by the insured client at the time of death is valued in the client's estate; a policy that is owned by an irrevocable life insurance trust is not.

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