Irrevocable Life Insurance Trust (ILIT): Remove Life Insurance from Your Taxable Estate

An Irrevocable Life Insurance Trust (ILIT) is a type of trust that owns a life insurance policy outside your taxable estate. When you die, the life insurance proceeds pay into the trust and are distributed to your beneficiaries — potentially free of both income tax and estate tax. For high-net-worth individuals facing estate tax exposure, the ILIT is one of the most effective tools for passing wealth to the next generation.

The Problem an ILIT Solves

If you own a life insurance policy on your own life, the death benefit is included in your taxable estate at death. For a $5 million estate that includes a $2 million life insurance policy, the full $7 million could be subject to estate tax — significantly reducing what passes to your heirs. An ILIT moves the policy outside your estate, removing that $2 million from the estate tax calculation while preserving the full $2 million death benefit for your beneficiaries.

How an ILIT Works

Create the trust: An attorney drafts an irrevocable trust with your chosen beneficiaries (typically your spouse and/or children). You name an independent trustee — often an adult child, sibling, or corporate trustee. You cannot be the trustee of your own ILIT.
Transfer or purchase the policy: The ILIT either purchases a new life insurance policy on your life, or you transfer an existing policy into the trust. If you transfer an existing policy, you must survive at least three years after the transfer or the IRS will still include the death benefit in your estate (the three-year lookback rule).
Fund the trust to pay premiums: The trust itself pays the insurance premiums. You make annual gifts to the trust — typically within the annual gift tax exclusion ($18,000 per beneficiary in 2025; $19,000 in 2026) — to fund premium payments. Your beneficiaries receive a Crummey notice giving them the right to withdraw those gifts for a limited time, which qualifies the gift for the annual exclusion.
At your death: The insurance proceeds are paid to the ILIT. The trustee distributes funds to beneficiaries per the trust terms, outside of probate and outside of the taxable estate.

The Crummey Notice: Why It Matters

For your annual gifts to the ILIT to qualify for the annual gift tax exclusion, they must be present-interest gifts — meaning the recipient must have the right to access the funds now, not just in the future. The Crummey notice satisfies this requirement by notifying beneficiaries that a gift was made and that they have a 30-day window to withdraw it. In practice, beneficiaries almost never exercise this withdrawal right, allowing the trust to use the gift for premiums. But the notice process must be followed precisely to preserve the gift tax exclusion.

ILIT vs. Outright Life Insurance Ownership

You own the policy: Simple setup, full control. Death benefit is included in your taxable estate. Works fine if your estate is under the federal exemption ($13.99 million per individual in 2026 under current law).
Policy owned by ILIT: More complex to set up and administer. No direct control over the policy. Death benefit is outside your estate, potentially saving millions in estate tax for large estates.

Can You Use an ILIT for Survivorship (Second-to-Die) Insurance?

Yes. Survivorship life insurance — which pays out at the death of the second spouse — is a common ILIT strategy. The premium is lower than insuring one life, and the death benefit arrives precisely when the estate tax bill is due (at the second spouse’s death, after the marital deduction expires). The ILIT holds the policy so the proceeds are outside both spouses’ estates.

Who Needs an ILIT?

An ILIT makes the most sense for:

Estates that exceed or are likely to exceed the federal estate tax exemption
Business owners whose estate value includes illiquid business interests that heirs cannot easily sell to pay estate taxes
Individuals with large life insurance policies who want to ensure heirs receive the full benefit without estate tax erosion

For estates well below the exemption threshold, the complexity and cost of an ILIT is usually not justified.

Costs and Considerations

Drafting an ILIT typically costs $1,500–$5,000 in attorney fees. Ongoing annual administration includes trustee fees, Crummey notice preparation, and accounting. The trust is irrevocable — once created and funded, you cannot take the policy back or change the beneficiaries without specific trust provisions allowing limited modifications.

Bottom Line

An ILIT is a well-established estate planning strategy for removing life insurance from a taxable estate while preserving the full death benefit for heirs. For estates above the estate tax exemption, the potential tax savings far exceed the cost of setup and administration. Work with an estate planning attorney and review your estate plan every few years as tax law and your circumstances change.