Irrevocable life insurance trust (ILIT)

An irrevocable life insurance trust (ILIT) is a trust set up to own, and be the beneficiary of, a life insurance policy. Because the insured gives up ownership and the right to change the trust, the death benefit is generally not included in the insured's taxable estate. ILITs are used mainly by people whose estates may exceed the federal estate tax exemption or a state estate tax threshold, and by families who want a trustee to manage the payout.

In a typical setup, an estate attorney drafts the trust, the trustee applies for a new policy with the trust as owner and beneficiary, and the insured makes yearly gifts to the trust to cover premiums. Beneficiaries receive Crummey notices so those gifts can qualify for the gift tax annual exclusion. At death, the trustee collects the proceeds and can lend money to the estate or buy assets from it to provide cash for taxes, or hold the money for heirs under the trust's terms.

Transferring an existing policy into an ILIT starts a three-year clock: if the insured dies within three years, the proceeds are pulled back into the estate. Paperwork or trustee mistakes can undo the tax benefit, so professional help matters. See irrevocable life insurance trusts and the three-year rule for transferring a policy.