Irrevocable Trust and Executive Bonus (Definition)

Combining an Irrevocable Life Insurance Trust (ILIT) with an executive bonus plan can be an effective way to have your employer pay the premiums on your life insurance policy. You establish an ILIT and enter into a bonus arrangement with your employer. The employer reports the bonus as taxable income to you. You use your bonus to make gifts to the ILIT. The trustee uses these gifts to purchase an insurance policy on your life and pay its premiums. At your death, the trust, as beneficiary, receives the life insurance proceeds. The trust uses the proceeds to purchase assets from your estate. The executor can use this cash to help pay estate taxes and expenses. The assets purchased by the trust are then distributed to the trust beneficiaries – your chosen heirs.