Legacy · 5 min read
ILITs explained
An irrevocable life insurance trust keeps a policy's payout out of your taxable estate. How it works, what it costs you in control, and who it fits.
An irrevocable life insurance trust keeps a policy's payout out of your taxable estate. How it works, what it costs you in control, and who it fits.
Pillar: Legacy · Reading time: 5 min
In plain words
If you own a policy on your own life, the death benefit counts in your estate. For most families that doesn't matter. For larger estates, or in states with their own estate tax, a big slice of the payout can go to tax.
An irrevocable life insurance trust, usually called an ILIT, is a trust that owns the policy instead of you. Because you don't own it, the payout generally isn't in your estate. The trust then holds and hands out the money under rules you set when you create it.
How an ILIT works, step by step
- An attorney drafts the trust. You are the grantor. You name a trustee, the beneficiaries (often a spouse and children), and the rules for distributions.
- The trust applies for or buys the policy. The trust is the owner and the beneficiary. You are the insured.
- You gift money to the trust. Each year you give the trust enough cash to pay the premium.
- The trustee sends Crummey notices. Each beneficiary is told they have a short window, often 30 days, to withdraw their share of the gift. They usually don't. This right is what lets the gift count toward your annual gift exclusion, $19,000 per beneficiary for 2026.
- The trustee pays the premium.
- At your death, the insurer pays the trust. The trustee follows your instructions: pay out in stages, hold money for minors, lend to the estate or buy assets from it so heirs have cash to pay taxes.
The three rules that make or break it
It is irrevocable. Once it is signed, you generally cannot change the beneficiaries, take the policy back or borrow its cash value yourself. That loss of control is the price of the tax benefit.
The three-year rule. If you move a policy you already own into an ILIT and die within three years, under current U.S. federal law (IRC Section 2035) the payout is pulled back into your estate. Having the trust buy a new policy from the start avoids this.
Crummey notices must actually happen. If the trustee skips them, gifts may not qualify for the annual exclusion and can use up your lifetime exemption or trigger a gift tax filing. Keep records.
Who an ILIT fits, and who it doesn't
The federal estate tax exemption is $15 million per person for 2026 under the 2025 tax law, indexed for inflation. A married couple can shield about $30 million. Most families are well below that, so for them the main reasons for an ILIT are not federal tax:
- State estate taxes, some of which start at a few million dollars or less.
- Control. Keeping a large payout away from a young adult, a beneficiary with creditor or divorce risk, or a beneficiary with special needs.
- Estate liquidity. Cash to pay taxes or settle an estate that is mostly a business, a farm or real estate.
- Future-proofing, since exemptions can change.
If your estate is modest and your beneficiaries are adults you trust, simply naming them as beneficiaries is often enough.
A worked example (illustrative)
Lena and Marcus, 52 and 55, are fictional. They own a manufacturing business, a home and savings worth about $34 million together. They live in a state with its own estate tax.
They want $5 million of life insurance to give their children cash at the second death, without selling the business. Their attorney sets up an ILIT, and the trust buys a survivorship policy.
| Policy owned by Lena and Marcus | Policy owned by the ILIT | |
|---|---|---|
| Death benefit | $5,000,000 | $5,000,000 |
| Counted in taxable estate | Yes | Generally no |
| Illustrative federal estate tax on the payout (40% above the exemption) | up to $2,000,000 | $0 |
| Who controls the money | Heirs directly | Trustee, under their rules |
They gift the annual premium of about $48,000 to the trust. With three children as beneficiaries, each sending Crummey notices, that is $16,000 per child, inside the $19,000 exclusion.
These numbers are illustrative only. They are not a quote, a tax calculation or a projection. Your own result depends on your estate, your state, the policy and current law.
Common mistakes
- Transferring an old policy late in life. The three-year rule can undo the plan. Consider a new policy owned by the trust from day one.
- Skipping Crummey notices. Missed notices are one of the most common ILIT errors.
- Naming yourself trustee. If you hold certain powers over the trust, the payout can be pulled back into your estate. Use an independent trustee.
- Paying premiums directly to the insurer. Gift to the trust, and let the trustee pay.
FAQs
Can my spouse be a beneficiary?
Yes. A spouse is often a beneficiary, with income and access for needs. Your attorney will draft this so the payout doesn't simply end up in your spouse's estate later.
What if I can't afford the premium one year?
The trustee can use any cash value, reduce the death benefit, or make the policy paid-up for a smaller amount. Choose a policy design with this in mind.
Can I end an ILIT?
Generally no; that is what irrevocable means. Some trusts allow a trust protector to make limited changes. Ask your attorney before signing.
Is an ILIT only for the very rich?
No. Families with state estate tax exposure, a family business, or beneficiaries who need protection often use one even with estates below the federal exemption.
Related strategies
- Survivorship (second-to-die) policies — the policy type ILITs often hold for couples.
- Wealth replacement with charitable giving — an ILIT replaces what you give away.
- Passing a family business on — trust-held cover for estate liquidity.
Next step
Take the Wealth Strategy Score at /score to see where legacy planning sits in your whole plan. When you're ready to price a policy for a trust, you can request a quote at /quote.
Education only, not personal financial, tax, legal or insurance advice. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency. All numbers are illustrative.