An irrevocable life insurance trust (ILIT) is a trust that owns a life policy on you and receives the death benefit. Because you do not own the policy, the proceeds are generally not part of your taxable estate (if the trust buys the policy from the start, or you survive three years after transferring an existing one). You fund premiums with gifts to the trust, usually using the annual exclusion. With a $15 million exemption, ILITs are now mostly for larger estates and for control: deciding when and how heirs receive the money and protecting it from their creditors.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
The problem it solves
If you own a life policy when you die, or hold any incidents of ownership such as the right to change the beneficiary or borrow against it, the death benefit is included in your gross estate under Section 2042. For a large estate, a $5 million policy could add $2 million of estate tax at the 40% rate. An ILIT owns the policy instead, so the proceeds pass to your heirs outside your taxable estate.
How an ILIT works
- Your attorney drafts the trust, naming a trustee (not you, and usually not your spouse if the trust benefits them) and beneficiaries.
- The trustee applies for and owns the policy on your life (or a survivorship policy on you and your spouse). The trust is the beneficiary.
- You make gifts to the trust each year; the trustee uses them to pay premiums.
- Beneficiaries receive Crummey notices giving them a brief right to withdraw each gift, which lets the gifts qualify for the annual exclusion; see Crummey letters.
- At death, the trustee collects the proceeds and follows the trust's instructions: pay out, hold in trust, buy assets from the estate or lend to it for liquidity.
New policy or existing policy?
| Trust buys a new policy | You transfer an existing policy | |
|---|---|---|
| Estate inclusion | Generally excluded from day one | Included if you die within three years of the transfer (Section 2035) |
| Gift tax | Premiums are gifts | The policy's value at transfer is a gift, plus later premiums |
| Underwriting | Requires qualifying now | Keeps coverage you already qualified for |
See the three-year rule for ways advisors handle existing policies.
Is an ILIT still worth it?
For federal estate tax, an ILIT matters mainly when your estate, including your life insurance, could exceed the exemption ($15 million per person in 2026). Families below that line still use ILITs for non-tax reasons:
- Control: pay heirs over time, at certain ages, or for specific purposes, instead of a lump sum.
- Protection: money held in a well-drafted trust can be shielded from a beneficiary's creditors and divorcing spouse.
- Special needs: fund a supplemental needs trust without disrupting government benefits.
- Blended families: make sure children from a prior marriage receive a defined amount.
- Liquidity: the trustee can buy illiquid assets from the estate or lend to it, giving heirs cash without a fire sale.
Running an ILIT
- Get a taxpayer identification number and a trust bank account.
- Make gifts to the trust account, not directly to the insurance company.
- Send Crummey notices for each gift and keep copies.
- Have the trustee pay premiums and review the policy periodically.
- File gift tax returns (Form 709) when your accountant advises.
Sloppy administration (paying premiums directly, skipping notices) is a common way ILITs lose their benefits.
Frequently asked questions
Can I be the trustee of my own ILIT?
Generally no. If you are the trustee, you have incidents of ownership over the policy, which pulls the death benefit back into your estate. Most people name a trusted family member, friend, advisor or a professional trustee.
Can my spouse benefit from my ILIT?
Yes. Many ILITs provide for the surviving spouse during their life and then pass to children. The drafting must avoid including the proceeds in the spouse's estate as well.
Can I change an irrevocable trust?
Not easily. Some trusts include a trust protector or decanting provisions, and some states allow modifications. Plan the terms carefully up front.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.