The Irrevocable Life Insurance Trust (“ILIT”) is a type of trust that owns the life insurance policy of the grantor. While life insurance is income tax free, it is still subject to an estate tax, which is why an ILIT is so valuable. It is designed to help avoid estate taxation on life insurance returns. An ILIT is a separate, legal entity that needs its own tax identification number and an account to accept gifts.


The current 2015 law dealing with the estate tax provides that estates in excess of $5.43 million are taxed at 35% to 40% for amounts above the exemption. However, lifetime gifts of more than the annual gift tax exclusion will also reduce the $5.43 million exemption.

In 2015, you can gift up to $14,000 per year to each of your beneficiaries and families members without incurring any gift or transfer taxes. Any gifts above this require a gift tax filing with the IRS but exemptions to gift taxes still exist. Please consult an attorney or CPA to determine how these exemptions will affect your gifting program.

We don’t know what will happen with the law. But a failure to plan for estate tax is equal to placing a sizeable bet on an unpredictable future. The more money you have, the bigger the bet you are making.


After the trust is set up, money is put into the trust and the Trustee, designated by the grantor, buys the life insurance policy. The grantor then makes gifts, usually in the form of annual payments, to the trust. The trustee uses these gifts to pay for the life insurance policy’s premiums.

Upon the death of the grantor, the money from the life insurance goes to the trust and then to the beneficiaries. If the grantor has a life insurance policy prior to setting up the trust, it can be transferred into the trust. Because the insurance policy is owned by the trust and not the grantor, it is irrevocable, which means that it cannot be changed by the grantor after it has been made.


The most important benefit of an ILIT is that it allows the grantor to keep his/her life insurance policy out of the value of their estate, thereby limiting the tax that must be paid on the estate. The reason the insurance policy is not considered a part of the estate is that it is not actually owned by the grantor, which is why it is important the grantor is not the trustee of the trust.

Another benefit is that grantors do not have to transfer their assets that may be income-producing because the money from the life insurance only becomes accessible after the grantor’s death. In addition, because life insurance can easily be converted to cash, the money in the ILIT can provide the money needed to pay the estate tax without having to liquidate other assets. An ILIT can also protect beneficiaries from creditors by including a spendthrift provision in the trust. Yet another benefit of an ILIT is that it can provide for transfers of gifts out of the estate with little to no gift tax.