What Is an Irrevocable Life Insurance Trust (ILIT)?
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An irrevocable life insurance trust is a trust that’s funded with one or more life insurance policies. “Irrevocable” means that once the trust is established, the grantor (the person who created the trust) can’t amend it or cancel it. It's different from a revocable trust, which allows the grantor to change the trust’s terms or dissolve it altogether.
With an ILIT and any other type of trust, there are three primary parties:
Grantor: The person who establishes the trust.
Trustee: The individual or organization charged with management and administration of the trust, including paying life insurance premiums.
Beneficiaries: The individual(s) who will receive the trust’s assets when the grantor dies.
Establishing an irrevocable life insurance trust separates the value of assets in your trust from the value of the assets in your taxable estate. When you die, the death benefit is paid directly to the trust. The trustee then distributes the assets to your beneficiaries according to the instructions you spelled out in the trust document.
An irrevocable life insurance trust may be funded or unfunded.
Funded irrevocable life insurance trusts: The trust owns income-producing assets and uses the income produced to pay life insurance premiums.
Unfunded irrevocable life insurance trusts: The trust’s only asset is the life insurance policy. The grantor makes annual gifts to the trust that the trustee uses to pay premiums.
Here are some common reasons you might consider an irrevocable life insurance trust in estate planning.
You’re concerned about estate taxes
Most people don’t need to worry about federal estate taxes because the first $13.61 million of an individual’s estate is exempt from federal estate tax in 2024, though some states impose estate taxes at lower thresholds. But if you’re concerned about estate taxes, funding an ILIT could provide the liquidity needed for estate taxes and other final expenses.
Setting up an ILIT could also help you avoid estate tax liability. If you transfer a policy to a properly structured ILIT at least three years before you die, the policy’s death benefit isn’t included in your gross estate.
In 2026, the federal estate tax exemption is scheduled to revert back to the pre-2018 amount of $5 million, adjusted for inflation.
You want creditor protection
When you die, an ILIT is generally off limits to your creditors. Your beneficiary’s creditors also can’t demand a distribution from an ILIT. A trustee can also use assets in an irrevocable life insurance trust to pay for your beneficiary’s expenses directly so that the money won’t be seized by creditors when the trust makes a distribution.
You have a loved one with a disability
ILITs are often used in special-needs planning to preserve a loved one’s eligibility for need-based government benefits, such as Medicaid.
Setting up an ILIT
An irrevocable life insurance trust is a complex estate-planning tool. If you think it may be appropriate for your needs, it’s essential to work with an experienced estate-planning attorney. If the trust is not administered properly, the life insurance proceeds could revert back to the estate.
If you are a trustee, it’s important to understand you are now a fiduciary, with a legal duty to act in the best interest of the trust’s beneficiaries.
Learn more about irrevocable life insurance trusts (ILITs)
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