What Is an ILIT (Irrevocable Life Insurance Trust)?

An irrevocable life insurance trust (ILIT) is a trust that owns a life insurance policy on your life, so that, if it's set up and run correctly, the death benefit is paid to the trust for your beneficiaries without being counted in your taxable estate. Under federal law, life insurance is pulled into your estate if you hold any "incidents of ownership" at death, such as the right to change the beneficiary, cash in the policy or borrow against it (IRC §2042). An ILIT works by making the trust, not you, the owner. Three points decide whether it works:

• whether you keep any of those rights;
• whether you transferred an existing policy within three years of death (§2035);
• how premiums are paid, usually through annual-exclusion gifts that beneficiaries can briefly withdraw (Crummey powers).

At a glance

Why life insurance can end up in your taxable estate

Many people assume life insurance is "tax-free." For income tax, death benefits are generally excluded from the beneficiary's gross income (IRC §101(a)(1)). Estate tax is a separate question. Section 2042 includes policy proceeds in your gross estate if:

• they're payable to your executor; or
• they're payable to anyone else, and at death you held any incident of ownership, alone or with someone else.

The Treasury regulation lists what counts: the power to change the beneficiary, surrender or cancel the policy, assign it, revoke an assignment, pledge it for a loan, or borrow against its cash value. A small reversionary interest, meaning a chance the policy comes back to you, also counts if it's worth more than 5% of the policy's value right before death.

For estates above the federal exemption, the top federal estate-tax rate is 40% (IRC §2001(c)). For 2026, the IRS sets the basic exclusion amount at $15,000,000 per person (Rev. Proc. 2025-32). Some states have their own estate taxes with different rules.

How an ILIT keeps the death benefit out of your estate

In a typical ILIT:

1. You sign an irrevocable trust and name a trustee who isn't you.
2. The trust buys the policy (or, less ideally, you transfer one you own; see below). The trust is both the owner and the beneficiary.
3. You make gifts to the trust, and the trustee uses them to pay premiums.
4. At your death, the insurer pays the trust. The trustee then holds or distributes the money under the trust's terms, for example for a spouse and children, or to give the estate cash to pay taxes and expenses.

Because you never hold any incident of ownership, the proceeds generally aren't included in your estate under §2042. The regulation also says a power held "as trustee or otherwise" to change who benefits counts as an incident of ownership. That's why the insured usually isn't the trustee.

New policy vs. transferring one you already own

• New policy bought by the trust: you never own it, so there's no transfer to worry about.
• Existing policy you transfer in: §2035(a) pulls the proceeds back into your estate if you die within three years of giving up your ownership rights. The regulation's own example: an irrevocable assignment four years before death, with nothing retained, keeps the proceeds out.

Transferring a policy can also raise income-tax issues. Section 101(a)(2) limits the income-tax exclusion when a policy is transferred "for valuable consideration," with exceptions. Have your attorney review any sale or transfer of an existing policy.

How premiums are paid: annual-exclusion gifts and Crummey powers

You fund premiums by giving money to the trust. A gift to a trust is often a future interest, and future-interest gifts don't qualify for the annual exclusion (§2503(b)). That's where Crummey powers come in. The trust gives each beneficiary a temporary right to withdraw their share of each gift. In *Crummey v. Commissioner* (9th Cir. 1968), the trust let each child demand up to $4,000 of a year's contribution by Dec. 31. The court allowed the annual exclusions because the demand "could not be legally resisted."

For 2026, the annual exclusion is $19,000 per recipient (Rev. Proc. 2025-32). Gifts above what the withdrawal rights cover use part of your lifetime exemption and may require a gift-tax return. Trusts commonly notify beneficiaries of each withdrawal right. The details of notice, timing and how unused rights lapse matter, so follow your attorney's process exactly.

What the trustee does

• Holds the policy and pays premiums from contributions.
• Sends any required withdrawal-right notices and keeps records.
• Files the death claim and manages or distributes the proceeds under the trust.
• Can, if the trust allows, lend to or buy assets from the estate to provide liquidity. Your attorney drafts this carefully so the proceeds aren't treated as payable to the estate.

What an ILIT can't do

• It can't be easily changed. It's irrevocable. Some states allow decanting or court modification, but you shouldn't plan on that. See What Is Trust Decanting?.
• It doesn't make premiums cheaper or the policy better. It only changes who owns it.
• It doesn't help if you keep control. Retained powers, an executor-payable policy or a death within three years of a transfer can undo the plan.
• It may not be needed. If your estate is likely to stay under the federal exemption and any state threshold, the cost and rigidity may not be worth it. That's a judgment for you and your advisers.

Who might consider an ILIT

ILITs come up most often for:

• people whose estates may exceed the federal or state exemption;
• business owners who need liquidity at death without selling the business;
• families who want insurance proceeds managed in trust rather than paid outright;
• blended families balancing a spouse and children from a prior relationship.

An ILIT is often paired with other planning. See SLATs, GRATs and dynasty trusts.

Featured attorneys: Haute Lawyer Network members who handle estate planning include Michael M. Marques, principal attorney and founder of The Marques Law Firm, PLLC in Boston, whose practice covers estate planning, probate, tax audit representation, and business and succession planning with a focus on generational wealth preservation, and Robert W. Haley, a Certified Elder Law Attorney (CELA®) and Managing Attorney at The Estate & Elder Law Center of Central/Southside Virginia, PLLC, focused on comprehensive estate planning, Medicaid planning and asset protection. Browse Estate Planning & Probate attorneys or Find a Lawyer. *Listed attorneys are paid members of the Haute Lawyer Network. Editorial selection, not a ranking.*

Related

• What Is an Irrevocable Trust?
• Can a Trust Reduce Estate Taxes?
• What Is Gift Tax?
• What Is Trust Decanting?
• What Is a Grantor Trust?
• What Is a Beneficiary Designation?
• Estate Planning for High-Net-Worth Families