What Is an Irrevocable Life Insurance Trust (ILIT) — and Who Can Benefit?

Estate planning uses various “tools” to reduce the amount of an estate that passes to heirs, thus reducing or eliminating the amount of estate tax that would have to be paid otherwise.  Examples of this are lifetime gifts, charitable gifts, creating “family limited partnerships” to reduce the remaining value in an estate, etc.  An often-overlooked tool that can be very powerful is a mechanism usually referred to as an “ILIT” or Irrevocable Life Insurance Trust.

An Irrevocable Life Insurance Trust is established to hold a life insurance policy, usually “whole life insurance” or “universal life insurance”, with the trust as the “owner” of the policy and the expected heirs as beneficiaries. The trust is then funded either by a series of annual gifts to pay the premiums or a large endowment gift intended to permanently fund the annual premium payments.

The annual gifting may fall under the annual “de minimis” gift exclusion, but one must remember that the annual gifts use up part of the per person, per year annual gift exclusion (currently $19,000).  For a married couple, this would cover $38,000 in gifts for 2026 for each beneficiary of the trust.  This means that if there are three children, the parents can give up to $114,000 annually to the trust to fund premiums.  However, care must be taken to keep track of all gifts made to each beneficiary; often overlooked are birthday, holiday, graduation, wedding, and other gifts made during the calendar year. All these gifts must be totaled together to determine whether the reporting exclusion has been exceeded.  Medical education expenses paid by parents for children are excluded from this total.

Effective use of ILITs can be achieved where an estate is known to be taxable, and the cost of life insurance for the individual is not prohibitive.  For example, a wealthy individual might arrange for a $10,000,000 life insurance policy to be purchased by an ILIT established for him or her, for the benefit of three children. He or she may then make annual gifts to pay the premiums on the policy plus the annual administrative costs, generally legal and accounting costs.  These payments deplete the assets in the estate, reducing the estate tax, but funds the non-taxable life insurance benefits which will at some point be received by the beneficiaries of the policy(s) in the ILIT.

ILITs can also be used to fund the expected estate taxes without increasing the taxable estate in the same manner as discussed above.

Another creative use of an ILIT is referred to as a “wealth replacement strategy” that can be used in conjunction with a Charitable Remainder Trust (CRIT, CRAT or CRUT) that is used to deplete an estate, achieve a significant income tax deduction and long-term cash flow.  In this instance, some of the cash flow from the CRT is used to fund a large ILIT policy, essentially restoring a significant portion of the wealth that was contributed to the CRT.  When used correctly, the net after-tax benefit to the family can be very substantial.

These strategies may not apply to all clients, but they illustrate an example of creative planning that can be done to maximize the after-tax wealth transfer to one’s heirs.  Currently, the lifetime exemption from estate tax is over $15,000,000 per individual estate.  (For married couples, that’s over $30,000,000).  That is the current exclusion, which under the current tax law will index for inflation.  Though this indexed exclusion was made permanent in 2025, we know from experience, in the tax law, “permanent” is not permanent.  All permanent means is that it won’t change until Congress acts to change it.  Remember, only about four years ago, there were significant discussions in Congress and the White House to drastically reduce the lifetime exemption from estate tax, so don’t be complacent.  Sometimes strategies that “do no harm” should be considered if they may really help in the future when the rules change.  ILITs are one of those strategies.

DBMCPA LLP has extensive experience working with clients to meet their planning needs.  Whether you are a person who owns a business or rental properties, has inherited wealth, or just needs to effectively plan for the future, we can help you.  Call us to discuss estate planning issues.