The Irrevocable Life Insurance Trust, in English

What an ILIT does

Life insurance is income-tax-free to your beneficiaries — the death benefit is excluded from their gross income by statute (IRC § 101(a)). What surprises people is that the same benefit can still be subject to the federal estate tax. The estate tax reaches the proceeds of any policy on your life if, at your death, you possessed “incidents of ownership” in it, or if the proceeds are payable to your estate (IRC § 2042). A policy paid directly to your children is not spared: what the statute measures is ownership, not who cashes the check.

“Incidents of ownership” is a term of art, and the Treasury regulation defines it broadly. It includes the power to change the beneficiary, to surrender or cancel the policy, to assign it or revoke an assignment, to pledge it for a loan, or to borrow against its cash value (Treas. Reg. § 20.2042-1(c)(2)). Hold any one of those, and the estate tax treats you as the owner. The point of an irrevocable life insurance trust — an ILIT — is to place the policy in the hands of a trustee, under a trust you cannot revoke, so that none of those incidents rest with you when you die. The death benefit then passes to your beneficiaries both income-tax-free (§ 101(a)) and outside your taxable estate.

That is the entire mechanism. Everything else in this cluster — the three-year rule, Crummey letters, funding, costs, unwinding — is detail in service of that one structural move: separating you from the ownership of the policy without separating your family from its proceeds.

Who actually needs one

Here is the part most sales pitches skip. The federal estate tax only applies above a very high threshold. For deaths in 2026 the basic exclusion amount is $15,000,000 per person, set by Congress in 2025 (Public Law 119-21) amending IRC § 2010(c)(3) and confirmed on the IRS’s own summary (“What’s New — Estate and Gift Tax”). A married couple who file for portability can shelter twice that — up to $30,000,000. Only estates above the exclusion, plus taxable lifetime gifts, owe the tax at all.

So who is the ILIT genuinely for? Three groups:

• Estates already near or above the exclusion, where a seven- or eight-figure death benefit would otherwise be taxed. A large policy can be the single line item that pushes an estate over the edge, and moving it out of the estate is the most direct fix.
• Residents of states with their own estate or inheritance tax. Several states tax estates at thresholds far below the federal $15 million — some under $2 million. There, an estate that owes nothing federally can still owe at the state level, and the death benefit’s inclusion matters at a much lower net worth. Check your state’s department of revenue; our Executor & Heir’s Guide explains where estate-level taxes sit in the broader picture.
• People who expect substantial growth — a business that may sell, a concentrated position, or simply decades of compounding — such that today’s comfortable margin under the exclusion may not hold. The exclusion is set by Congress and has changed before; planning is about the estate you will have, not only the one you have now.

If you are not in one of those groups, the most useful thing this page can do is talk you out of an ILIT and toward the simpler ownership structures on the alternatives page.

How it works, end to end

An ILIT is an ordinary irrevocable trust with an insurance policy as its main asset. The moving parts are few, and they fit together in a fixed sequence:

1. You create the trust and name a trustee. The trustee is not you — naming yourself trustee with power over the policy would hand you incidents of ownership and defeat the purpose. It is typically a trusted individual (an adult child, a sibling, a friend) or a professional or corporate trustee.
2. The trust applies for and owns the policy. The cleanest structure by far is for the trust to buy a new policy on your life, so you never hold ownership at all. Transferring an existing policy is possible but triggers the three-year rule (IRC § 2035), covered on its own page.
3. You put money into the trust to pay premiums. You cannot pay the insurer directly without undermining the structure; instead you make gifts to the trust, and the trustee pays the premium. Those gifts are where the annual gift-tax exclusion and the Crummey mechanism come in — see funding.
4. The trustee sends Crummey notices. A plain gift to a trust is a gift of a future interest and would not qualify for the annual exclusion. Giving the beneficiaries a brief right to withdraw each contribution converts it into a present interest that does qualify (Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)). The notices are the paperwork that makes this real; see Crummey letters.
5. The trustee pays the premium each year. The beneficiaries let their withdrawal rights lapse, the money stays in the trust, and the policy is kept in force.
6. At your death, the trustee collects the benefit. Because the trust owned the policy and you held no incidents of ownership, the proceeds are outside your estate (§ 2042), and because it is life insurance, they are income-tax-free to the trust (§ 101(a)). The trustee then holds or distributes the money under the trust’s terms — which can also provide liquidity to your estate by buying assets from it or lending to it, without the benefit itself being taxed in the estate.

The elegance is that each step is boring on its own. The care is in not breaking the chain: keep ownership away from you, document the gifts and notices, and respect the three-year rule when an existing policy is involved. For the general mechanics of moving assets into a trust — retitling by asset type, and the tax rules that turn on the transfer — see our trust-funding cluster.

What it costs

An ILIT costs money to create and to run, and this is an area where you should be wary of anyone quoting a precise national “average.” There is no authoritative government dataset for what it costs to draft or administer an ILIT — figures in circulation are practitioner estimates, not statistics. We therefore describe the cost drivers honestly rather than inventing a number:

• Drafting. A lawyer drafts the trust, usually for a one-time fee that varies with complexity and locale. A straightforward ILIT is a modest document; one integrated with a larger estate plan costs more.
• Trustee fees. An individual trustee (a family member) often serves without a fee. A professional or corporate trustee charges — commonly as a percentage of assets under administration or a flat annual fee, frequently with a stated minimum. These are set by each institution and vary widely; ask for the fee schedule in writing.
• Annual administration. The recurring burden is real: sending Crummey notices every year, keeping trust records, filing a gift-tax return when required, and maintaining a trust bank account. This is the cost most people underestimate — not in dollars, but in diligence.

The costs page lays out each driver in more detail, framed as a checklist of what to price — deliberately without a fabricated average.

The alternatives

An ILIT is one tool among several, and for most families a simpler one wins. Owning a policy outright is free and easy, and if your estate is under the exclusion it costs you nothing in estate tax. A straightforward beneficiary designation avoids probate on the proceeds without any trust at all. And for couples who do face an estate-tax problem, a spousal lifetime access trust (SLAT) can solve a related one while preserving indirect access to the money — with its own risks. We compare all of these, plainly, on the alternatives page, including the honest bottom line that most estates under the exclusion do not need any trust at all.

When it’s the wrong tool

An ILIT can be a mistake, and a good advisor will say so. The clearest cases:

• Your estate is under the exclusion. If the tax you are avoiding is a tax you would never owe, you are paying drafting and administration costs — and giving up control — for nothing.
• You want to keep control. Irrevocability is the price of the tax benefit. You cannot be the trustee with power over the policy, you cannot borrow against it for yourself, and you cannot change your mind and take it back. If those matter more than the tax, the ILIT is the wrong fit.
• You need the timing to work and it might not. Moving an existing policy into an ILIT starts a three-year clock; die inside it and the benefit is dragged back into your estate (§ 2035(a)). For someone in poor health, that risk can undercut the entire plan.
• You would rather your heirs get a step-up in basis. Assets an ILIT holds are outside your estate and generally do not receive the date-of-death basis step-up that estate assets get (IRC § 1014). For a death benefit this is usually irrelevant — insurance proceeds are already income-tax-free — but it matters if the trust holds appreciating assets, and it is a reason the “keep it in the estate” alternatives deserve a real look.

None of these is a reason ILITs are bad. They are reasons an ILIT is a specific tool for a specific situation — and the discipline of this cluster is to help you tell whether yours is that situation.

Common questions

Sources & methodology