The Purpose of an Irrevocable Life Insurance Trust
Posted by Cheryl A. Jankowski on September 25, 2025
Life insurance is often a cornerstone of estate planning, providing liquidity to cover estate taxes, debts, or other obligations. But here’s a critical detail many overlook: if you own the policy outright, the life insurance proceeds will generally be included in your taxable estate. For individuals with sizable estates, this can create a significant tax burden.
One powerful strategy to avoid this issue is using an Irrevocable Life Insurance Trust (ILIT). By transferring ownership of the policy to an ILIT, you can remove it from your estate, ensuring that the death benefit passes to your beneficiaries free of estate tax.
How an ILIT Works
An ILIT is an irrevocable trust designed specifically to hold a life insurance policy.
- Create the trust and designate beneficiaries.
- Transfer ownership of an existing policy to the ILIT or have the ILIT purchase a new policy.
- Fund the trust so it can pay premiums.
- Transferring an existing policy to an ILIT is considered a taxable gift, and future contributions for premiums are also treated as gifts.
- These gifts can be offset by your lifetime gift and estate tax exemption. Adding Crummey provisions may allow you to use the annual gift tax exclusion (currently $19,000 per recipient for 2025) for premium payments.
Because the trust is irrevocable, you cannot change its terms once established—such as altering beneficiaries. This loss of control is what keeps the proceeds outside your taxable estate. You can, however, appoint a family member or professional as trustee.
Typically, the ILIT is named as the policy’s beneficiary. Upon your death, the proceeds go into the trust and are distributed to your chosen beneficiaries—often your spouse, children, or grandchildren.
Potential Pitfalls
While ILITs offer significant benefits, there are important considerations.
- Three-Year Rule: If you transfer an existing policy and die within three years, the proceeds will still be included in your taxable estate. This rule doesn’t apply if the ILIT buys a new policy.
- Spousal Beneficiary Risk: Naming your spouse as the sole beneficiary may only delay estate tax liability until their death.
Is an ILIT Right for You?
An ILIT is not a one-size-fits-all solution. It’s most beneficial for high-net-worth individuals facing potential estate tax exposure. The trust can provide heirs with tax-free liquidity when it’s needed most—without forcing the sale of family assets or business interests to cover tax bills.
However, if estate tax liability isn’t a major concern, the benefits may not outweigh the downsides of giving up control. Consulting with an estate planning professional can help you determine whether an ILIT aligns with your goals.
An ILIT can be a powerful tool for preserving wealth and minimizing estate taxes, but it requires careful planning. If you’re considering this strategy, let’s discuss how it fits into your overall estate plan.
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Cheryl has extensive experience working with business owners and individuals on minimizing taxes, with a focus on succession planning. With a thoughtful approach, Cheryl helps clients explore their long-term goals and plan accordingly. Leveraging Cheryl’s expertise in this area, the goal is to implement plans that achieve the wishes of the client and provide for tax-efficient transitions. Cheryl’s passion for working with corporations and individuals has allowed her to become a trusted business advisor. She has worked with clients not only in the Western New York region but also throughout the country. The breadth of this experience has allowed her to collaborate with other professional advisors to ensure that plans are flexible and innovative in the ever-changing world in which we live. Cheryl started her career with the Firm in 1991 and rejoined in 2019 adding additional strength to the tremendous talent of the Lumsden McCormick tax team.