Irrevocable Life Insurance Trusts (ILITs): Removing Life Insurance from Your Estate

Life insurance is one of the most efficient ways to transfer wealth to the next generation — but there's a catch that many policyholders don't realize: if you own the policy yourself, the death benefit is included in your taxable estate.

On a $2 million policy, if your estate is already at the taxable threshold, that $2 million could generate $800,000 in federal estate tax — effectively cutting the benefit in half.

An Irrevocable Life Insurance Trust (ILIT) solves this problem by removing the policy from your taxable estate entirely.

Here's how it works: The trust — not you — owns the life insurance policy. Because you don't own the policy, the death benefit is not included in your gross estate for estate tax purposes. When you die, the trust receives the death benefit and distributes it to your beneficiaries according to the trust's terms.

Key features and requirements:

• Irrevocability. Once established, you cannot revoke or amend the trust without beneficiary consent. This permanence is what creates the tax benefit.

• Crummey notices. To use your annual gift tax exclusion to fund the trust's premiums, the trust must give beneficiaries a brief window to withdraw contributions — a procedural requirement called a Crummey notice. Most beneficiaries don't exercise this right, but the notice must be given.

• Three-year rule. If you transfer an existing policy to an ILIT, you must survive three years for the transfer to remove the policy from your estate. New policies purchased by the trust don't have this limitation.

An ILIT requires careful ongoing administration — but for estates with significant insurance and estate tax exposure, it's a highly effective tool.

📌 If you own life insurance and your estate may be subject to estate tax, an ILIT could save your heirs hundreds of thousands of dollars. Let's talk — contact us today.