Irrevocable life insurance trusts (ILITs)

An irrevocable life insurance trust (ILIT) is a trust that owns a life insurance policy on your life and collects the death benefit for your heirs. Because you no longer own the policy or control it, the proceeds are generally not part of your taxable estate under 26 U.S.C. §2042. With a 2026 federal estate tax exclusion of $15,000,000 per person, an ILIT is mainly for people whose estates are near or above that level, or who live in a state with a lower estate tax threshold.

How an ILIT works

Three parties are involved:

• The grantor (you, the insured) creates the trust and funds it with gifts of cash. You cannot be the trustee or hold any power over the policy.
• The trustee is an independent person or institution. The trustee applies for the policy, owns it, pays the premiums from the cash you gift, and distributes the proceeds under the trust's terms.
• The beneficiaries are usually your spouse, children or grandchildren. The trust can pay out over time, hold money until a child reaches a set age, or protect inheritances from creditors and divorce.

When you die, the insurer pays the death benefit to the trust, free of income tax. The trustee follows your instructions. The trust is "irrevocable": you generally cannot change its terms, take back the policy or change beneficiaries once it is signed, which is exactly what keeps the policy out of your estate.

Why people use one

1. Estate tax. A policy you own is counted in your estate; a policy the trust owns is not. See life insurance and the federal estate tax for the 40% rate and the exemption.
2. Liquidity. The proceeds can supply cash to pay estate taxes, debts or business buyouts without a forced sale of property. See estate liquidity: paying taxes and debts without a fire sale.
3. Control. The trust can set conditions and ages for distributions and name successors. A trust named as beneficiary arrangement gives some control too, but it does not remove the policy from your estate if you still own it.
4. Protection. Properly drafted trust assets are generally shielded from a beneficiary's creditors and from claims in a divorce, depending on state law.

How premiums get paid: gifts and Crummey powers

You do not own the trust's assets, so each premium is a gift from you to the trust. A gift to a trust is a "future interest" and would not qualify for the annual gift tax exclusion, which is $19,000 per recipient in 2026. The usual fix is a Crummey power, named after Crummey v. Commissioner (9th Cir. 1968): each beneficiary is given a temporary right, often about 30 days, to withdraw their share of each gift. The trustee sends a notice (the crummey letter). If no one withdraws, the money stays in the trust to pay the premium.

This approach keeps the gifts within the annual exclusion, so no gift tax return is required for most of them, though you should keep the notices and ask your attorney how to report them. Gifts beyond the exclusion use part of your lifetime exemption and require a Form 709 gift tax return. See gift tax and life insurance premiums.

Buy new, or transfer an existing policy?

A new policy bought by the trustee is the cleanest route: you never owned it, so there is nothing to pull back into your estate. You are still the insured and must qualify medically.

An existing policy you own can be transferred to the trust, but a transfer within three years of death brings the proceeds back into your estate under §2035. See the three-year rule for transferring a policy. A transfer is also a gift valued at roughly the policy's cash value or replacement cost, and a transfer for payment can raise the the transfer-for-value rule. For these reasons, ownership changes need an attorney's drafting, not a form from the insurer. The mechanics of changing owners are in transferring ownership of a life insurance policy.

What an ILIT costs and what you give up

• Setup and upkeep. Attorney fees to draft the trust, the cost of a professional trustee if you use one, a trust tax ID number, annual records and, in some years, a trust income tax return.
• Discipline. Premiums must pass through the trust account, with gift letters and notices on time. Paying premiums directly from your own account can undermine the structure.
• Loss of control. You cannot borrow from the policy, change beneficiaries or reverse the decision. Divorce, a changed family or a repealed tax law can leave the trust in place.
• Cash value access. In a permanent policy the trustee, not you, controls the cash value, although the trust can allow the trustee to lend to a spouse beneficiary.

Who should and should not consider one

The 2026 exemption is permanent in the sense that it has no sunset, but Congress can change estate tax law at any time. Use the estate tax exposure check to see where you stand.

Steps to set one up

1. Estimate your estate and the death benefits you own.
2. Choose a trustee who is neither you nor your spouse in most designs, and name a successor.
3. Have an estate planning attorney draft the trust and decide on Crummey language and beneficiaries.
4. Obtain a tax ID number and open a trust bank account.
5. Have the trustee apply for the policy, or transfer an existing policy and note the date.
6. Gift cash to the trust for each premium, send the notices, and keep records.

Key takeaways

• An ILIT owns your life insurance so the death benefit is not counted in your taxable estate.
• You cannot control the policy or amend the trust once it is signed.
• Crummey withdrawal rights let premium gifts qualify for the $19,000 (2026) annual exclusion.
• Buying a new policy in the trust avoids the three-year rule; transferring an existing policy does not.
• An ILIT matters mainly for estates near the $15,000,000 federal exemption or in states with lower thresholds.