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Irrevocable life insurance trust (ILIT)
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Depends on youExperts differ; the right answer depends on your situation.
An irrevocable trust that owns life insurance so the death benefit stays outside the insured person's taxable estate.
See it on the Personal Finance & Estate map →How it works
The trust buys the policy, or receives an existing one, and is both owner and beneficiary. You gift premium money each year; beneficiaries get brief 'Crummey' withdrawal rights so the gifts qualify for the $19,000 annual exclusion. At death the trustee collects tax-free cash to lend to the estate or buy its assets, covering estate tax, or to equalize heirs. Traps: transferring an existing policy within three years of death pulls it back into the estate, and you can't easily change terms later.
Why it matters for you
Depends on you. Under the $15 million exemption most families don't need one for tax, but it still serves very large or illiquid estates, such as one dominated by a building.
Rules, limits and sources (2026)
IRC Sec. 2042 (incidents of ownership) and Sec. 2035 (three-year rule); Crummey v. Commissioner (9th Circuit, 1968) approved the withdrawal-right technique.
Watch out for
Whether to keep, unwind or repurpose older ILITs now that far fewer estates owe tax is debated; ask your attorney before letting a policy lapse.
Connections (4)
▸Irrevocable life insurance trust (ILIT) is a type of Irrevocable trustStandard practice
How they connect
An ILIT is an irrevocable trust built around one asset: life insurance. Because you permanently give up control, the policy isn't yours for estate-tax purposes, which is the whole point. It follows every irrevocable-trust rule: an independent trustee, its own tax ID and terms you can't easily change.
When it applies
A staple of estate plans for decades, drafted by estate attorneys working with insurance advisors for families facing estate tax.
How sure?
IRC Sec. 2042 excludes a policy when the insured holds no 'incidents of ownership', which the irrevocable structure provides.
Watch out for
Which powers the insured can keep, such as replacing the trustee, without pulling the policy back into the estate is technical; drafting errors are a real risk.
▸Irrevocable life insurance trust (ILIT) owns Life insuranceLaw or rule (2026)
How they connect
The ILIT is the policy's owner and beneficiary. The trustee pays premiums from your gifts and, at death, collects the proceeds and handles them under the trust's terms. Because you never own the policy, proceeds avoid estate tax; they remain free of income tax as usual.
When it applies
Best set up so the trust buys a new policy itself; moving an existing policy into it starts a three-year clock.
The rule
IRC Sec. 2042 (ownership) and Sec. 2035 (three-year rule for transferred policies); insurers record the trust as owner.
Watch out for
Second-to-die policies are common in ILITs; whether term, guaranteed UL or whole life fits best depends on cost and goals.
▸Irrevocable life insurance trust (ILIT) keeps proceeds out of Federal estate & gift tax (unified; California has none)Law or rule (2026)
How they connect
Life insurance owned by the insured counts in their taxable estate. An ILIT owns the policy instead, so proceeds land outside both spouses' estates. The insured gifts premiums to the trust, usually using annual exclusions through Crummey notices. Transferring an existing policy works only if the insured survives three more years.
When it applies
ILITs grew after the 1954 code's Sec. 2042 based estate inclusion on 'incidents of ownership'; the 1968 Crummey case enabled premium gifts.
The rule
IRC Secs. 2042 and 2035; Crummey v. Commissioner (9th Cir. 1968) upheld gifts subject to withdrawal rights.
Watch out for
With a $15 million exemption, many older ILITs may no longer save estate tax; whether to keep, modify or unwind them is debated.
▸Survivorship (second-to-die) life insurance is usually owned by an Irrevocable life insurance trust (ILIT)Standard practice
How they connect
If either spouse owns the policy, its payout counts in the taxable estate, where up to 40% can go to tax. Having an irrevocable life insurance trust buy and own the policy from the start keeps proceeds outside both estates. Yearly gifts to the trust, within the $19,000 per-beneficiary exclusion, pay the premiums.
When it applies
Standard estate-planning practice since the 1980s; buying the policy inside the trust avoids the three-year rule for transferred policies.
How sure?
IRC Sec. 2042 (incidents of ownership) and Sec. 2035 (three-year rule); 'Crummey' withdrawal notices trace to a 1968 appeals court case.
Watch out for
With a $15 million exemption per person, how many ILITs are still needed, and whether to unwind older ones, is debated.