What Is an Irrevocable Life Insurance Trus🐻t (ILIT)?

An irrevocable life insurance trust (ILIT) is a trust created during the insured's lifetime that owns and controls a term or permanent life insurance policy or policies. The trust can also manage and distribute the proceeds that are paid out upon the insured’s death, according to the insured's wishes.

In addition, an irrevocable life insurance trust protects the benefits stemming from a life insurance policy from estate taxes. Since it's irrevocable, it generally cannot be altered or undone after it's created.

How an Irrevo🥂cable Life Insurance Trust (ILIT) Works

An ILIT has several parties: the grantor, trustees, and 澳洲幸运5开奖号码历史查询:beneficiariesꦕ. The grantor typically creates and funds the ILIT. Gifts or transfers made to the ILIT are permanent. The t🧸rustee manages the ILIT, and the beneficiaries receive distributions.

It is important for the grantor to avoid any incident ownership in the life insurance policy. 🌼Any premium paid should come from a checking account owned by the ILIT.

Ther🐼e can also be gifting problems if the policy being transfer🍬red has a large accumulated cash value. 

If there is a question about the grantor being able to obtain coverage and you want to verify insurability before paying the expense of having a trust drafted, have the grantor apply for coverage and list the owner as a trust to be named.

Once the life insurance company has made an offer, the initial application is replaced by a new application which properly lists the trust as the owner. The policy will then be issued♑ to the trust.

Once established and funded, an ILIT can serve many purposes. Below are some of the main reasons to𒆙 set up🐎 an ILIT.

1. Minimizing Estate Taxes

If you are the owner and insured, then the death benefit of a life insurance policy will be included in your 澳洲幸运5开奖号码历史查询:gross estate. However, when life insurance is owned by an ILIT, the proce💯eds from the death benefit are not part of the insured's gross estate and thus not subject to state and federal estate taxation.

If properly drafted, the ILIT can provide 澳洲幸运5开奖号码历史查询:liquidity to help pay 澳洲幸运5开奖号码历史查询:estate taxes, as well as other debts and expenses, by purchasing assets ♕from the grantor’s estate or through a loan. Also, lifetime gifts can help reduce your taxable estate by transferring assets into the ILIT. 

2. Avoiding Gift Taxes

A properly-drafted ILIT avoids gift tax consequences since contributions by the grantor are considered gifts to the beneficiaries. To avoid 澳洲幸运5开奖号码历史查询:gift taxes, it is crucial that the trustee, using a Crummey letter, notify the beneficiaries of the trust of their right to withdraw a share of the contributions for a 30-day period.

After 30 days, the trustee can then use the contributions to pay the insurance policy premium. The Crummey letter qualifies the transfer for the annual gift tax exclusion by making the gift a present rather than future interest, thus 🍌avoiding the need in most cases to file a gift tax return. 

In 2025, you can give up to $19,000 (up from $18,000 in 2024) a year to an individual without reporting it to the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS). The $19,000 encompasses all gifts. A 澳洲幸运5开奖号码历史查询:married couple✱ who files jointly can give an individual a combined $38,000 (up from $36,000 in 2024) in 2025 without reporting it to the IRS. Anything more than that, and you must report the gift via Form 709. Note: You don't need to pay taxes on the gifts unless your gift exceeds the lifetime gift exemption amount, which is $13.99 million in 2025 (up from $13.16 million in 2024).

3. Government Benefits

Having the proceeds from a life insurance policy owned by an ILIT can help protect the benefits of a trust beneficiary who is receiving government aid, such as 澳洲幸运5开奖号码历史查询:Social Security disability income or Medicaid. The trustee can carefully control how distributions from the trust are used so as not to interfe♔re with the beneficiary's eligibility to receive government benefits.

4. Asset Protection

Each state has different rules and limits regarding how much cash value or death benefit is protected from creditors. Any coverage above these limits held in an ILIT is generally protected from the creditors of the grantor and/or beneficiary. The creditors may, however, attach any distributions made from the ILIT.

5. Distributions

The trustee of an ILIT can have discretionary powers to make distributions and control when 澳洲幸运5开奖号码历史查询:beneficiaries receive the proceeds of the policy. The insuran🌸ce proceeds can be paid out immediately to one or all of the beneficiaries. Or the grantor can specify how an🦄d when beneficiaries receive distributions.

The trustee can also have the discretion to provide distributions when beneficiaries attain certain milestones, such as graduating from college, buying a first home, or having a child. It’s r💞eally up to the grantor. This can be useful in second marriages to ensure how assets are distributed or if the grantor has children who are minors.     

6. Legacy Planning

The 澳洲幸运5开奖号码历史查询:genera💞tion-skipping tr൲ansfer tax (GSTT) imposes a tax of 40% on both outright gifts and transfers in the trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor.

A common example is gifting to grandchildren instead of children. An ILIT helps leverage the grantor’s generatiᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚon-skipping transfer (GST) tax exemption by using gifts to the trust to buy and fund a life insurance poli꧒cy.

Since the proceeds from the death benefit are excluded from the grantor’s estate, multiple generations of the family—children, grandchildren, and great-grandchildren—may benefit from the trust's assets free of estate and GST tax.

7. Tax Considerations

澳洲幸运5开奖号码历史查询:Irrevocable trusts have a separate tax identification number and an income tax schedule. However, the cash value accumulating in a life insurance policy is free from taxation as is the death benefiꦬt. So there are no tax issues wi🍷th having a policy owned in an ILIT.

If properly designed, an ILIT can allow the trustee access to the accumulated cash value by taking loans and/or distributions on a 澳洲幸运5开奖号码历史查询:cost basis, even while the insured is alive. However, once a death benefit has been paid, if the proceeds remain in the trust, any investment income earned and not distributed to the beneficiaries could be taxed.

The Bottom Line

ILITs are a powerful tool that should be considered in many wealth management plans to help ensure that your policy is used in the best possible way to benefit your family. Even with the federal estate and gift tax exemption at $13.99 million in 2025 (up from $13.61 million in 2024), it is still possible to owe state estate taxes. Many states begin 🍸taxing y💖our estate at $1 million or less.