Life Insurance Trusts: Who can benefit?

Irrevocable Life Insurance Trusts

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ILIT Overview

An Irrevocable Life Insurance Trust (ILIT) is a type of trust specifically designed to hold and own life insurance policies. Once established, the trust becomes the owner of the insurance policies, which effectively removes the death benefit from the insured’s estate, potentially reducing estate taxes. Upon the death of the insured, the trust collects the insurance proceeds, which are then managed and distributed to the trust beneficiaries according to the terms set out in the trust agreement. This arrangement allows for more control over the insurance proceeds, providing financial benefits to the beneficiaries while keeping the proceeds outside of the insured’s taxable estate.

Key benefits of ILITs

Key benefits of an ILIT include:

  1. Estate Tax Reduction: By owning the life insurance policy, the ILIT effectively removes the death benefit from the insured’s estate, potentially reducing estate taxes.
  2. Asset Protection: The proceeds of the life insurance policy are shielded from the insured’s creditors, as the trust owns the policy, not the individual.
  3. Control Over Proceeds: The grantor of the ILIT can set specific terms for how the proceeds are to be distributed, ensuring that beneficiaries receive the funds according to the grantor’s wishes.
  4. Avoidance of Probate: Since the ILIT is a trust, the proceeds of the life insurance policy can be distributed to beneficiaries without going through the probate process, which can be time-consuming and costly.
  5. Gift Tax Benefits: Premiums paid into the ILIT can be structured in a way that utilizes the annual gift tax exclusion, thereby minimizing or avoiding gift taxes.
  6. Generation-Skipping Transfer Tax Benefits: An ILIT can be designed to provide benefits to multiple generations without incurring generation-skipping transfer taxes.
  7. Providing Liquidity: The ILIT can provide immediate funds to pay estate taxes and other expenses without the need to liquidate other estate assets.
  8. Preservation of Government Benefits: For beneficiaries who are receiving government benefits, such as special needs individuals, an ILIT can be structured to provide financial support without disqualifying them from their benefits.

Who benefits and how?

Avoiding or reducing estate taxes

  • Presently, the estate tax exemption amounts are $13,610,000 for individuals and $27,220,000 for married couples. If your net assets fall below these thresholds, you might assume estate planning isn’t necessary.
  • However, if your net assets exceed approximately $7 million (individuals) or $14 million (married couples), or if you anticipate growth in your estate beyond these amounts, it’s prudent to start planning now.

This is because there is a reasonable chance that Congress will not act and simply let the currently high exemption amount expire with the end og 2025. See Estate Taxes In 2025: Wait Until Too Late?

The trust beneficiaries of an Irrevocable Life Insurance Trust (ILIT) typically do not have to pay income taxes on the proceeds of the life insurance policy received after the insured’s death. This is because life insurance proceeds are generally not considered taxable income to the beneficiary under U.S. federal tax law. The primary purpose of an ILIT is to own a life insurance policy and, upon the death of the insured, distribute the proceeds to the beneficiaries according to the terms of the trust without the proceeds being included in the taxable estate of the deceased.

But even if you are not that rich, other individuals and families with various financial situations can also find value in ILITs for several reasons:

Asset Protection: he asset protection features of an Irrevocable Life Insurance Trust (ILIT) can benefit both the settlor and the beneficiaries. For the settlor, once the life insurance policy is transferred into the ILIT, it is no longer owned by the settlor, which means creditors of the settlor typically cannot claim against the policy. This provides a level of asset protection for the settlor against future creditor claims.

For the beneficiaries, the ILIT provides asset protection because the trust owns the policy, not the beneficiaries. This means that the beneficiaries’ creditors generally cannot claim against the trust assets. Additionally, because the ILIT is irrevocable, the beneficiaries are protected from their own potential mismanagement of the funds, as the trustee controls the trust assets according to the terms of the trust.

Furthermore, the trustee of an ILIT can be granted discretionary power to shift the beneficial interest in the trust among beneficiaries, which can be used as a strategy to protect trust assets from beneficiaries’ creditors. If creditor problems are imminent, the settlor’s spouse and children can be named as initial beneficiaries, and the settlor retains a limited power of appointment to prevent imposition of a gift tax. After a specified term of years, the beneficial interest can shift to the settlor.

It’s important to note that the specific asset protection benefits can vary depending on the terms of the ILIT, the jurisdiction in which it is established, and the individual circumstances of the settlor and beneficiaries. 

Control Over Distribution: Individuals who wish to have specific control over the distribution of their life insurance proceeds can benefit from an ILIT. For example, you can dictate the terms under which beneficiaries receive funds, which is particularly useful in complex family situations, such as blended families or for the care of a special needs child.

Business Planning: For small business owners, an ILIT can be a strategic tool for business succession planning.

  1. Providing Liquidity: ILITs can provide immediate funds upon the death of a business owner to facilitate a smooth transition of ownership without the need to liquidate business assets.
  2. Funding Buy-Sell Agreements: ILITs can be used to fund buy-sell agreements, ensuring that there are sufficient funds to buy out the deceased owner’s interest in the business.

Avoiding Probate: Since the proceeds of the life insurance policy owned by an ILIT are not considered part of the estate, they can be distributed to beneficiaries without going through probate. This can be an advantage for many people, not just those with large estates, as it simplifies the process and reduces time and expenses involved.

Potential downsides of an ILIT

The irrevocable nature of an Irrevocable Life Insurance Trust (ILIT) means that once it is established and funded, the grantor relinquishes control over the policies and the assets within the trust. This loss of control is a significant consideration as the grantor cannot change the trust terms or beneficiaries once the ILIT is in place. This rigidity can be a downside if the grantor’s circumstances or wishes change.

The cost of setting up and maintaining an ILIT can also be a potential downside. There are initial legal fees for drafting the trust document and ongoing costs associated with administering the trust, including trustee fees, tax preparation fees, and potential advisory fees. These costs should be weighed against the potential estate tax savings and other benefits the ILIT provides.

From a legal and tax perspective, there are several considerations to keep in mind. The transfer of an existing life insurance policy to an ILIT may have gift tax implications, and if the insured dies within three years of transferring the policy, the proceeds may still be included in the estate for estate tax purposes. Additionally, the ILIT must be properly structured to avoid any adverse tax consequences, and annual gifts to the ILIT to pay premiums must qualify for the annual gift tax exclusion, often requiring the use of Crummey notices.

Careful drafting is required to ensure the ILIT’s objectives are met without creating unintended tax consequences. For instance, if the ILIT is not properly structured, or if the grantor retains certain interests or powers over the trust, it could result in the trust assets being included in the grantor’s estate, negating the benefits of the ILIT. Moreover, the trustee must manage the ILIT in accordance with both the trust terms and applicable laws, which can be complex and require specialized knowledge.

When should you buy the insurance policy for an ILIT and what products are suitable?

When considering the purchase of insurance for an Irrevocable Life Insurance Trust (ILIT), it is generally advisable to establish the trust before applying for the insurance policy. The trust should be the original applicant, owner and beneficiary of the policy to avoid any incidents of ownership that could result in the inclusion of the policy proceeds in the insured’s estate. As for the types of products suitable for an ILIT, term insurance is often used for its affordability and simplicity, providing a death benefit without an investment component. Whole life, universal life, and variable life policies can also be used, offering both a death benefit and a cash value component, which can be beneficial for long-term estate planning goals. It is important to select a policy that aligns with the specific objectives of the ILIT and the financial situation of the grantor.

For older individuals or those with health complications, term life insurance might not be the most cost-effective or practical strategy for estate planning, or it may simply not be available.

A second-to-die insurance policy, also known as survivorship or joint life insurance, covers two people, usually spouses, and issues the death benefit following the death of the second insured. This policy is often used in estate planning to provide necessary funds for estate taxes or to establish funding for a trust after both spouses have passed. These policies tend to be more affordable than two separate policies, particularly if one of the spouses has health issues, since the premiums and risk calculations consider the combined life expectancy.

Within the structure of an Irrevocable Life Insurance Trust (ILIT), a second-to-die policy proves advantageous by providing liquidity exactly when needed—after the death of the second spouse, typically when estate taxes are due. To ensure that the death benefit is not counted in the taxable estate of the second deceased spouse, it is crucial for the ILIT to be designated as both the policy owner and beneficiary.


An Irrevocable Life Insurance Trust (ILIT) serves as a powerful tool for estate planning, offering benefits like estate tax reduction, asset protection, and controlled distribution of assets that extend beyond the reach of creditors and probate. While primarily beneficial for those with assets exceeding current estate tax thresholds, the strategic use of an ILIT can also provide significant advantages for individuals with various financial circumstances. These include safeguarding assets from creditors, ensuring specific distribution wishes are honored, and maintaining beneficiary eligibility for government benefits. Despite its irrevocable nature and the costs associated with its setup and maintenance, the strategic advantages of an ILIT, especially when properly structured and managed, can outweigh these considerations, making it a valuable component of a comprehensive estate plan. For those considering an ILIT, consulting with a specialized estate planning attorney is crucial. Klaus Gottlieb, Esq., at Wealth Care Lawyer with offices in San Luis Obispo, CA, and Cayucos, CA, can provide knowledgeable advice and assistance in setting up an ILIT if it is deemed suitable for your financial and estate planning needs.

What are Irrevocable Trusts For?

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