An irrevocable life insurance trust (ILIT) is an irrevocable trust created to own a life insurance policy on the person who funded it, so that the death benefit is paid to the beneficiaries outside that person’s taxable estate.
In plain terms
Life insurance proceeds are income tax free to the beneficiary, which most people know, and estate tax inclusive if the deceased owned the policy, which most people do not. A $10 million policy owned personally by someone with a taxable estate delivers roughly $6 million after federal estate tax. Owned by a trust from the start, it delivers $10 million. The ILIT exists to break the link between the insured and the policy — the insured cannot own it, change it, borrow against it, or name its beneficiary.
How it works
Under IRC § 2042, the full face value of a policy is pulled into the gross estate if the decedent held any incident of ownership at death — the right to change beneficiaries, surrender the policy, assign it, or pledge it as loan collateral. So the trustee, not the insured, applies for the policy, owns it, and is named beneficiary. The insured signs nothing except the application as the person being insured.
Premiums are the awkward part. The insured gifts cash to the trust each year, and the trustee pays the carrier. For those gifts to qualify for the annual gift tax exclusion they must be present interests, which a contribution to a trust is not — so beneficiaries are given a short window, customarily 30 days, to withdraw their share instead. That withdrawal right is a Crummey power, named for the 1968 Ninth Circuit case that blessed it, and the trustee’s annual notice letter is the paperwork that keeps the exclusion alive. Beneficiaries are expected not to exercise it; if they routinely did, the structure would collapse.
Moving an existing policy into an ILIT triggers § 2035: die within three years of the transfer and the proceeds return to the estate as though nothing happened. A policy bought by the trust from the outset never starts that clock.
The numbers
- Annual gift tax exclusion, 2026: $19,000 per beneficiary per donor, $38,000 for a married couple splitting gifts, per Rev. Proc. 2025-32. A trust with four beneficiaries can absorb $152,000 of split-gift premiums a year without touching the lifetime exemption.
- Federal estate tax avoided: 40% of the death benefit above the $15,000,000 exemption per person.
- Three-year lookback on transferred policies: § 2035.
- Crummey notice window: typically 30 days, by convention rather than statute.
- The 5-and-5 limit: a lapsing withdrawal right is a taxable gift by the beneficiary only above the greater of $5,000 or 5% of trust assets, under IRC § 2514(e) — the reason large ILITs use hanging powers.
- Income tax on the death benefit: none, under § 101(a).
What people get wrong
That the ILIT is set-and-forget. It is the most administratively fragile structure in common use, and it fails through neglect rather than aggression. Crummey notices skipped for a few years can cost the exclusion on those premiums retroactively. Premiums paid directly to the carrier by the insured, rather than gifted to the trustee, muddy the ownership record. Trustees who never review a policy discover too late that a universal life contract priced in a high-rate era is now underfunded and lapsing. And the trust owns the policy permanently, so a family whose estate later falls below the exemption — or whose circumstances change entirely — is left holding an expensive contract it no longer needs and cannot simply cancel back into its own hands.
Related
Read more: Trusts: How Wealth Is Held, Protected, and Passed On · Inheritance: The Transfer of Wealth Between Generations · Insurance for the Wealthy: Umbrella, Art, Kidnap, and Estate
See also: Irrevocable trust · Grantor trust · Annual gift tax exclusion · Estate tax exemption · Dynasty trust