A decision tree like this can help explain what happens in certain cases with the assets of a husband and wife when the first spouse dies, following different paths for Trust A and Trust B.
Text in this example:
Husband's and Wife's Assets when first spouse dies Trust B
No Estate Tax Trust A
No Estate Tax Trust B: $1,000,000 Descendent's
Exemption Trust A: This trust contains the Assets of the Decedent in excess of $1,000,000 Surviving Spouse Dies Surviving Spouse Dies Taxable Assets from Trust "A" are taxable if they exceed the surviving spouses $1,000,000 exemption Assets from Trust "B" are not estate taxable. No Estate tax Irrevocable Life Insurance Trust No Estate Tax Life insurance in the Irrevocable Life Insurance Trust is not estate taxable. Living Trust with Irrevocable Life Insurance An irrevocable life insurance trust (an "ILIT") is an irrevocable trust created for the principal purpose of owning a life insurance policy. As with any other trust, the insurance trust is a contract between a grantor and a trustee to administer certain property, in this case an insurance contract, for the benefit of named beneficiaries. The insurance trust, like other irrevocable trusts, cannot be rescinded, amended, or modified in any way after it is created. Once the grantor contributes property to the trust, he cannot later reclaim ownership of the property or change the terms of the trust.
One of the primary reason executing a life insurance trust is estate tax considerations. If an ILIT is properly structured, the death benefits paid to the trust will be free from inclusion in the gross estate of the insured. In addition, the ILIT can also be structured so that the trust will provide benefits to the insured's surviving spouse without inclusion in the surviving spouse's gross estate either.