Irrevocable Life Insurance Trust (ILIT)

An ILIT is an estate planning tool that allows you to carve out a portion of your estate as a permanent life insurance policy, in an irrevocable trust, in order to reduce or even eliminate estate tax.

The basic principles of an Estate Trust are explained in our blog “What is an Estate Trust?” An ILIT is an estate planning tool that allows you to carve out a portion of your estate in the form of an Irrevocable Trust solely comprised of a permanent Life Insurance policy. An ILIT can help reduce or even eliminate estate tax and provide cash for beneficiaries.

The Grantor sets up an ILIT by buying a new or transferring an existing Life Insurance policy to the Trust. If transferring, a 3-year look back period apply, which means that if the Grantor dies within 3 years of setting up the ILIT, the Estate may not get the tax benefits of an ILIT. The policy insures the Grantor’s life, but the trust owns and is the sole beneficiary of the policy. Once created, the ILIT cannot be modified.

When the Grantor passes, the Life Insurance proceeds (death benefit) are paid to the Trust by the insurance company. The Trustee will then distribute the proceeds to the beneficiaries according to the ILIT terms originally set by the Grantor. These proceeds themselves are not subject to estate or income taxes. They can be used to pay for the estate tax on the rest of the Estate, provide a lifetime income for the surviving spouse through an annuity, provide structured payments for children or grandchildren, or placed in a living trust for the family (please read “Family Living Trust” for more information), as specified in the ILIT.

The ILIT asset is not part of the Estate and has a separate Tax ID. Hence, the ILIT asset is protected from the creditors of the Grantor and the beneficiaries. An ILIT typically uses a No-Lapse Guarantee (NLG) permanent life policy, which has no cash value, or an insurance policy in which the cash value grows tax-free. It is best to avoid any taxable income from a Trust because of its high tax rates (see “Key Aspects of the TCJA Law” for a summary of changes to tax rates).

The Grantor cannot be the Trustee, but he or she can appoint their spouse or children to be the Trustee. The Grantor should avoid any “incidents of ownership” in the eyes of IRS. This means that the Grantor cannot be seen as controlling the Trust or else the ILIT may be deemed as still being part of the Grantor’s estate.

The ILIT policy premiums are funded by the Grantor. This contribution is governed by Gift Tax laws (detailed in our blog “Estate and Gift Taxes”) when Crummey letters are sent to beneficiaries. These are procedural letters advising the ILIT beneficiaries of their right to withdraw cash from the ILIT. After waiting for a 30-day period, the Trustee can then use this cash to pay for the policy premium.

Please refer to our blog “Charitable Remainder Trust (CRT)” for innovative ways with which to use an ILIT with a CRT to restore the asset donated to a charity.

We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at

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