What is an Irrevocable Life Insurance Trust (ILIT)?

An Irrevocable Life Insurance Trust (ILIT) is a legal entity designed to own a life insurance policy. Its primary purpose is to remove the death benefit from the insured's taxable estate, helping high-net-worth individuals reduce estate taxes and control how wealth is distributed to beneficiaries. Once established, the trust cannot be easily changed or revoked.

How does an ILIT help reduce estate taxes?

An ILIT helps reduce estate taxes by owning the life insurance policy. When the trust owns the policy, the death benefit is generally not included in the insured's gross estate upon their death. This means the proceeds pass directly to the trust's beneficiaries free from federal estate taxes, which can be significant for estates exceeding the federal exemption amount.

Can I be the trustee of my own ILIT?

No, you generally cannot be the trustee of your own ILIT if your goal is to remove the life insurance proceeds from your taxable estate. To achieve the intended estate tax benefits, the grantor (the person creating the trust) must relinquish all incidents of ownership and control over the policy, which includes not serving as the trustee.

What is the "three-year rule" for ILITs?

The "three-year rule" states that if you transfer an *existing* life insurance policy into an ILIT, and you die within three years of that transfer, the death benefit will still be included in your taxable estate. To avoid this rule, it's often recommended that the ILIT purchase a *new* life insurance policy directly.

How are life insurance premiums paid for an ILIT?

Life insurance premiums for an ILIT are typically paid through annual gifts from the grantor to the trust. These gifts are often structured to qualify for the annual gift tax exclusion (expected to be $18,000 per beneficiary in 2026) by using Crummey notices, which give beneficiaries a temporary right to withdraw the gifted funds.

Who should consider setting up an ILIT?

Individuals with a high net worth, whose estates are likely to exceed the federal estate tax exemption (expected to be around $13.61 million per individual in 2026), should consider setting up an ILIT. It is particularly beneficial for those looking to minimize estate taxes, provide liquidity for estate expenses, protect assets from creditors, and maintain control over wealth distribution to heirs.

Can an ILIT be changed after it's created?

No, an ILIT is an irrevocable trust, meaning it generally cannot be easily changed or revoked once it's created and funded. This irrevocability is fundamental to its estate tax benefits. While some states allow for limited modifications under specific circumstances (e.g., judicial modification or decanting), it is a complex and often difficult process.

ILIT: Life Insurance in a Trust for High-Net-Worth Families…