By Harry Prabandham · Updated September 28, 2026
Estate & Legacy
Irrevocable Life Insurance Trusts (ILITs): How They Work
An ILIT owns life insurance on your life so the death benefit is kept out of your taxable estate, if the trust, not you, holds all ownership rights.
Irrevocable Life Insurance Trusts (ILITs): How They Work
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What is an irrevocable life insurance trust?
- It is an irrevocable trust that owns and is the beneficiary of a life insurance policy on your life.
- Because you hold no incidents of ownership, the death benefit is generally excluded from your taxable estate.
- The trust document controls how proceeds are used, such as paying estate costs or supporting heirs over time.
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Full Guide
What is an irrevocable life insurance trust?
- It is an irrevocable trust that owns and is the beneficiary of a life insurance policy on your life.
- Because you hold no incidents of ownership, the death benefit is generally excluded from your taxable estate.
- The trust document controls how proceeds are used, such as paying estate costs or supporting heirs over time.
Why is life insurance included in an estate?
- Proceeds are included if you hold any incident of ownership at death, such as the right to change beneficiaries, borrow, or surrender.
- Naming a child as beneficiary doesn't change that; ownership is what matters.
- With a $15 million per-person basic exclusion in 2026, this matters mostly for larger estates.
What is the three-year rule?
- If you transfer an existing policy to an ILIT and die within three years, the proceeds are pulled back into your estate.
- Having the trust apply for and buy a new policy from the start avoids that transfer.
- Selling a policy to a grantor trust is another approach, but it raises transfer-for-value questions for counsel.
How are premiums funded?
- You make gifts to the trust, and the trustee pays the premiums from trust funds.
- Crummey withdrawal rights with written notice can let those gifts qualify for the annual exclusion, $19,000 per beneficiary in 2026.
- Larger premiums may use lifetime exemption and require a gift tax return.
What mistakes cause problems?
- Paying premiums directly to the insurer instead of through the trust.
- Skipping Crummey notices or keeping no records of them.
- Serving as your own trustee, which can create an incident of ownership.
- Letting a policy lapse because no one monitored premiums and performance.
Key takeaways
- An ILIT keeps a death benefit outside your taxable estate when set up and administered correctly.
- New policies bought by the trust avoid the three-year rule on transfers.
- It is irrevocable, and administrative mistakes can undo the benefit.
- Rubric coordinates ILIT planning with your estate attorney; drafting and tax treatment are for counsel and your CPA.
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