Irrevocable life insurance trusts (ILITs) remain one of the most effective and popular estate planning tools, and we write about them quite a bit. However, some clients still worry about the issue of flexibility when deciding whether or not to create an ILIT. That concern is understandable, since in most cases the insured must retain no powers of ownership or appointment of the trust assets in order to remove the death benefits from the insured’s estate and avoid estate and gift taxes. So what happens in the case of unforeseen circumstances, such as births or deaths in the family?

Flexibility is important, and fortunately, estate planning with an ILIT need not be inflexible. The client need only weigh the benefits of various techniques to decide which will be preferable in any given situation. For example, the trust creator could

• Give the primary beneficiary (other than a spouse) a general or special power to distribute trust assets in accordance with his or her will;
• Grant an independent trustee power to distribute the policy to the ILIT’s beneficiary, terminate the ILIT and distribute the policy to another trust, or change the trust situs;
• Create a "defective" or "grantor-trust" ILIT.

Whether a grantor-trust ILIT is created intentionally or unintentionally, it offers maximum flexibility (at the expense of the income tax) and opens a host of other planning opportunities that would not be possible with a traditional ILIT.