How an ILIT Removes Life Insurance From Your Estate
Life insurance you own is part of your taxable estate. An irrevocable life insurance trust keeps the entire death benefit out of it.
A surprise many people miss
People assume life insurance is tax-free. The death benefit is indeed income-tax-free to beneficiaries — but if you own the policy, the entire benefit is included in your taxable estate. On a $5 million policy, that can mean $2 million of estate tax that no one expected.
An irrevocable life insurance trust (ILIT) fixes this. By having the trust own the policy instead of you, the death benefit stays out of your estate entirely. The ILIT Calculator quantifies the estate tax this can save.
How the structure works
You create an irrevocable trust, and the trust applies for and owns the life insurance policy. You make gifts to the trust each year, which the trustee uses to pay the premiums. At your death, the trust collects the death benefit and distributes it to your beneficiaries — free of estate tax and outside probate.
Because you do not own or control the policy, it is not in your estate. The trade-off is exactly that loss of control: the ILIT is irrevocable, and you cannot later borrow against the policy or change its ownership on a whim.
Crummey powers and the annual exclusion
The gifts you make to fund premiums need to qualify for the annual gift-tax exclusion ($19,000 per recipient in 2026) so they don't consume your lifetime exemption. The classic technique is the 'Crummey' power: beneficiaries are given a brief window to withdraw each contribution, which makes the gift a 'present interest' that qualifies for the exclusion.
In practice beneficiaries are notified but decline to withdraw, and the trustee then pays the premium. The notices are a paperwork requirement that must be handled correctly every year for the strategy to hold up.
The leverage of insurance in a trust
What makes an ILIT compelling is leverage: relatively modest annual premiums can fund a large death benefit, and that benefit passes entirely tax-free. The calculator shows the ratio of total premiums paid to the death benefit delivered — often several times the dollars contributed.
For families whose estates are illiquid (a business, real estate, or a farm), an ILIT also provides cash to pay any estate tax due without forcing a fire sale of the underlying assets.
Existing policies and the three-year rule
You can transfer an existing policy into an ILIT, but if you die within three years of the transfer, the IRS pulls the benefit back into your estate. For that reason, many people buy a new policy directly inside the ILIT rather than transferring an old one.
Comparing term and permanent coverage, shopping rates, and setting up the trust all benefit from professional help. Insurance marketplaces can surface competitive quotes, and an estate attorney should draft the trust and the Crummey provisions.
Read the full guide